July 26, 2008

Origins of Fannie & Freddie

The early Origins of the Mortgage Mess

It is interesting how a government agency evolved into some curious form of hybrid, unlike any other. In 1938, to help restart the housing market after the great depression Fannie Mae was created and funded to help provide liquidity to home buyers.

In 1968, Fannie was privatized and Freddie came into existence. The financial page of the New Yorker makes some interesting observations.

The claim is that the hybrid nature of these two agencies of the government came into being as an accounting trick. By recreating Fannie as semi private and Freddie as a private corp., they were able to take the mortgage debt off the books. Considering that they now have a combined mortgage ownership equal to the national debt, this helped the US look much more solvent as it was deficit spending to finance its Vietnam war effort.

The special relationship of these two companies to the government enabled them to borrow at better rates. This allowed them to buy or guarantee more mortgages, providing the liquidity to fund the idea that everyone could be a homeowner.

The real problem is when companies become so big that they can tip the boat when they mismanage. No doubt better oversight is on the way. Hopefully, they will be broken up into manageable pieces, so that if this ever happens again, they will not be so large as to tip the whole boat.

Thanks for Reading

Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

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