In 2008, the subprime mortgage crisis brought the United States economy to its knees, and six years later, we are still picking up the pieces. On March 11, an agreement between two key senators indicated that they were ready to deal with what many believe is one of the final large pieces of financial reform in the wake of the recession.
A plan was agreed upon by the two top ranking members of the Senate Banking Committee to finally do away with Fannie Mae and Freddie Mac, two mortgage companies that were taken over by the Federal government back in 2008. Both companies have always been government sponsored enterprises, or GSEs, originally created to expand the secondary mortgage market. Fannie Mae was created as part of the New Deal, while Freddie Mac was introduced in 1970 to create competition in the market.
After being taken over in 2008, the Federal government spent $187.5 billion to keep them afloat through 2011, preventing a bankruptcy that would have had a disastrous impact. However, the market has rebounded since, and the government has actually turned that loss into a profit since. Even in the wake of the financial crisis, the two companies, along with the Federal Housing Administration, have continued to back a vast majority of new mortgages.
Even so, it seems that both companies are on their way out. The bipartisan agreement between the top-ranking Democrat Tim Johnson and his Republican counterpart, Mike Crapo, would replace them with new regulations and a new government insurance fund similar to the FDIC. Banks and firms that package mortgages into securities would be required to hold at least 10% of the loans. The new insurance fund, called the Federal Mortgage Insurance Corporation would pick things up from there, with money collected as fees from the industry over time.
Not surprisingly, prices of Fannie Mae and Freddie Mac immediately plummeted after the announcement. In the coming weeks, the plan will be drafted into legislation and voted on by the Banking Committee before moving on to the full Senate. While it seems to have the support of the Senate and the White House, House Republicans have voiced opposition to the plan. They believe the government sponsored mortgage companies should be dissolved over a period of time and not replaced, allowing the private sector to come up with a solution on its own. Both plans would reduce the role of the federal government in backing home loans to some extent.
At Stok Kon & Braverman, we are real estate attorneys in South Florida that guide buyers and sellers through the legal and tax ramifications of ownership of real property near Aventura and Miami, Florida. To do this effectively requires a deep knowledge and understanding of the way government regulations affect the real estate industry. For this reason, we are keeping a close eye on the future of Fannie Mae and Freddie Mac.