Congressional Democrats are reeling from Obamacare, Republicans are caving in to President Obama’s budgetary demands and the first lady is emotionally wounded because of her husband’s flirtatious behavior in South Africa. That’s the sum total of activity in Washington, D.C. here at year’s end — right?
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Not quite. Lurking quietly in the halls of the U.S. Senate is, apparently, growing bipartisan support for legislation that is supposed to “reform” Fannie Mae and Freddie Mac. Yet some fear that the “Corker-Warner bill” — named for Senator John Corker (R-Tenn.) and Senator Mark Warner (R-Va.) could threaten the very existence of the 30-year mortgage and put American taxpayers on the hook with even more debt.
First, some facts about “Fannie and Freddie.” Officially known as the Federal Home Loan Mortgage Corporation, “Freddie” is by definition a government-sponsored enterprise (GSE). Freddie and its counterpart Fannie Mae (the Federal National Mortgage Association) compromise the nation’s two largest mortgage finance lenders and — as GSE’s — they both operate under some unique conditions.
Both companies are owned and operated by private shareholders, yet they are also exempt from state and local income taxes and are exempt from oversight by the U.S. Securities And Exchange Commission, even though they both have access to credit directly from the U.S. Treasury. The purpose of these two quasi-governmental entities is to expand the secondary-mortgage market (that is, the market for securities and bonds that are financially “backed” by mortgages) in the United States. As such, they buy individual mortgages, “pool” them together and sell them to investors as “mortgage-backed securities.”
Mortgage-backed securities are themselves very complex financial instruments, wherein the risk of borrowers defaulting on their loans is spread out so as to minimize the pain should defaults happen. When investors buy a mortgage-backed security (MBS), they are essentially backing somebody’s mortgage loan or, in other words, the buyers of the MBS become the mortgage lenders (buyers also collect the interest on the loan, as well). This is because an MBS essentially allows a smaller bank to extend a mortgage loan without significant concern as to the borrower’s ability to pay back the debt. The loan will eventually be bought by other investors anyway, so, the bank becomes merely a “middleman” between the borrower and the broader investment market.
Some people — our president perhaps being the most high-profile among them — blame “greedy bankers” for the mortgage-market collapse of the last decade, yet Fannie and Freddie, complete with congressional approval, played a role as well. While the intended agendas of these two institutions may be worthwhile, they nonetheless create a scenario where a whole lot of banking and financing power is placed in the hands of politicians. That power can be used as a tool to accomplish the short-term political goals of those politicians, and in the aftermath of the 2008 economic crisis, evidence emerged suggesting that this is a big part of what happened.