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March 10th, 2010 11:35 AM by David W. Welch
Anthony Randazzo with the Reason Foundation wrote a piece for the Washington Times arguing for the dismantling of Fannie Mae and Freddie Mac. First, I would like to disclose that Anthony was a Sunday School student of mine years ago, so I am very proud to see him doing so well and published in a major newspaper. With that said, I agree with his conclusion that Fannie and Freddie need to stand on their own. For those who don't really know what purpose these enterprises serve, it is a vital one. Fannie and Freddie help create and facilitate the secondary mortgage market. When you take out a loan to purchase a home, the note you sign likely conforms to Fannie or Freddie guidelines. By conforming to those guidelines, your loan can be bundled with other conforming loans and sold in the secondary market. This allows the bank to recoup the cash they just loaned and loan it again. In Anothony's article he states that Fannie and Freddie either hold or guarantee $5 trillion in debt. That is trillion with a capital "T".
That is why in 2008 the federal government stepped in and completely took over the two quasi-governmental entities, declaring them too big to fail. I am not arguing with that particular move, because the results of a complete collapse would have been devastating. I believe, like Anthony that the government needs to have a plan to get completely out of this business. I also believe that the financial meltdown of 2008 should have taught the entire industry a valuable lesson. Too big to fail can also mean too big to succeed. If Fannie and Freddie were AT&T of 30 years ago, the justice department would file suit to bust them up. I don't presume to have all the answers, but regional entities makes some sense to me because real estate is about the local market. Just look at the large insurers who have separate legal corporations just in the state of Florida to help with their risk exposure. In addition to limiting exposure, regional entities can react more quickly to trends in their local markets, easing or tightening guidelines as necessary to facilitate a healthy primary and secondary market for mortgages.
I believe that the size of these two entities as they exist now, contributed to the financial debacle from which we are still emerging. The sheer magnitude of the assets being managed, held, and guaranteed is too big. The levels of bureaucracy have become too immense, and the leaders too detached from the market. Between the billions for banks, the stimulus and more than a trillion The Fed has spent purchasing mortgage backed securities, my estimate of the cost to the average American is over $9,000. Proper management of lending guidelines could have helped reign in some of the exuberance in the real estate market that played a major role in the situation in which we are working to get out. Fannie and Freddie may be too big to fail, but in my opinion they are too big to bail again.
Orlando Real Estate, David Welch Real Estate Optimist