What Will Replace Fannie Mae and Freddie Mac?

Graph of 10-year Notes

(Best Syndication News) The President proposed doing away with the two-big government sponsored enterprises (GSE), replacing them with private capital and an increased role for government.

Part of the government role will be to provide “incentives” for financial institutions to provide “high quality loans and products.” The role of the Federal Housing Administration (FHA) will also continue. FHA will guarantee continue to guarantee qualified bank loans. The administration also expects to strengthen the lending market with legislative proposals.

The Obama Administration also hopes to streamline refinancing for borrowers with government insured mortgages. This could help homeowners take advantage of today’s lower mortgage rates before they go up.

The plan is to expand eligibility for refinancing for hundreds of thousands of homeowners with special programs through the FHA, or even Fannie Mae and Freddie Mac.

During the heart of the Great Depression, the government helped lenders with Fannie Mae. Fannie would buy the mortgages from lenders putting money back into the system for more loans. It seemed to work. Later the Federal Government created Freddie Mac to compete with Fannie Mae and spun both GSEs off to the private sector.

Fannie Mae and Freddie Mac bought mortgages from lenders and sold mortgage backed securities (MBS) to sustain itself. Both companies made a profit when they were privately held. But that changed in the recent financial crisis and the government had to bring both back under it’s purview.

Fannie Mae and Freddie Mac played a role in loosening up money for banks. President Barack Obama is proposing winding-down the two GSEs. The goal – according to the Whitehouse – is to put private capital at risk in the future and avoid taxpayer bailouts.

By: Dan Wilson

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