Fannie Mae and Freddie Mac, originally created by Congress in 1938 and 1970 respectively, helped to ensure a reliable and affordable supply of mortgage funds in the USA. In the 2008 financial crisis, the federal takeover helped to provide liquidity to stabilize the U.S. housing market. They have now been ordered by regulators to take serious steps to diminish risks that have been proliferating across the market over the past few months.
According to reporting from the Wall Street Journal, for instance, Fannie Mae and Freddie Mac will be pulling back on mortgages originally intended to help individuals who would otherwise struggle to obtain homeownership find a place to live and call their own. The two companies will be seriously mitigating the total number of loans that they offer to borrowers, as regulators are concerned that a spree of heavy borrowing could imperil the wellbeing of the American housing market.
According to the Federal Housing Finance Agency’s official webpage, these two companies “attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing.” Regulators are worried about the free-flowing liquidity in the American housing market right now, however, and thus have stymied the flow of cash to potential homeowners who may not have excellent credit histories.
These “risky mortgages,” unlike next day business loans; are effectively bets that the federal government is no longer confident will pay off. By extending credit to those who could potentially not pay back their mortgages, the two companies may enable a crisis very similar to that which occurred in 2008. Seeing this coming well ahead of time, federal regulators decided to step in. Reducing their exposure to risky loans will necessarily mean that fewer people can purchase houses, however.
Analysis from Fox Business indicates that this move could also help the Federal Housing Finance Agency take both companies public, an extraordinarily expensive endeavor that could ultimately cost billions. “Reining in risk could limit their defaults and producer bigger profits, possibly helping the firms appeal to investors as the FHFA looks to take both companies public,” Fox reported.
These two companies were both placed into a conservatorship under the purview of the American government following the disastrous crash of 2008 that plunged the broader national housing market into turmoil. Making both of them more profitable by reducing risky loans which can be defaulted on will likely help the companies ultimately escape the conservatorship that private interests have decried for years.