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Fannie + Freddie = Frannie ?

Posted By Barry Ritholtz On September 2, 2008 @ 6:44 am In Bailouts,Credit,M&A,Real Estate | Comments Disabled

Hmmmm . .  take two poorly run, debt laden GSEs . . . Merge them . . . What do you get ?

One giant, poorly run, debt laden, GSE.

Its an idea so powerfully bad, ill conceived, and poorly thought out, it has precisely zero chance of occurring. If you think an idea this foolish, pointless, and banking fee laden could only have come from anals (sp) of Wall Street, then congratulations! You’ve figured out how some of the best and the brightest operate on the Street of Dreams.

A brief history lesson of these two entities quickly reveals what a silly idea this is:

In the depths of the Great Depression, the housing sector was an utter disaster. Its been estimated that over the course of the early 1930′s, nearly one in 5 homes were in danger of default and foreclosure. The Home Owner’s Loan Act of 1933 created The Home Owner’s Loan Corporation (HOLC) in order to “relieve the mortgage strain and then liquidate.” From June 1933 to June 1935, the HOLC received 1,886,491 applications for $6.2 billion of home mortgage refinancing, an average of $3272 per application. HOLC purchased old mortgages in exchange for government bonds, and then reissued the mortgages at a lower interest rate.

Incidentally, in those days, mortgages were not 30 year fixed principal and interest mortgages we know today. Instead, the typical mortgage was an interest only, 3 – 5 year loans, with a balloon payment at the end. They did not amortize (pay down principal over time). Typically, home owners renewed upon maturity.  When credit froze up, the home owner lost the ability to roll the old loan into a new mortgage — hence, the danger of losing their house.

Fannie Mae (FNM) was formed in 1938 to provide additional liquidity, creating a secondary mortgage market. Creating an entity to provide liquidity to the secondary market for mortgages would free banks to make additional loans.

In 1968, with the US budget under severe pressure form the costs of the Viet Nam war, Lyndon Johnson moved Fannie Mae "off balance sheet" of the federal budget. But once this government service became a private entity, it created a functional monopoly. To create some competition, in 1970 the Federal Home Loan Mortgage Corporation (FHLMC) was formed. That is the entity we now know  as Freddie Mac (FRE). (History lesson over)

What would the creation of "Frannie" accomplish?

Well, other than generating some banking fees, not a whole lot. It would remove competition from the the secondary mortgage market. It would put two management teams with a long history of corruption together. Lastly, it would create an even bigger lobbying and political influencing entity.

No thanks . . .

>

Sources:
And They Could Call It Frannie [1]
ANDREW ROSS SORKIN
NYT, September 1, 2008 
http://www.nytimes.com/2008/09/02/business/economy/02sorkin.html

The Federal Response to Home Mortgage Distress: Lessons from the Great Depression [2]
David C. Wheelock
The Federal Reserve Bank of St Louis Review.  May/Jun 2008
http://www.allbusiness.com/banking-finance/banking-lending-credit-services-mortgage/11461606-1.html

From the New Deal, a Way Out of a Mess [3]
Alan S. Blinder
NYT, February 24, 2008
http://www.nytimes.com/2008/02/24/business/24view.html

Long Term Policy Evolved By HOLC [4]
NYT, January 2 1936
http://spiderbites.nytimes.com/pay_1936/articles_1936_01_00006.html

History and Policies of the Home Owners’ Loan Corporation [5]   
C. Lowell Harriss
New York, NY. National Bureau of Economic Research. 1951
http://www.nber.org/chapters/c3204.pdf


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2008/09/fannie-freddie-frannie/

URLs in this post:

[1] And They Could Call It Frannie: http://www.nytimes.com/2008/09/02/business/economy/02sorkin.html

[2] The Federal Response to Home Mortgage Distress: Lessons from the Great Depression: http://www.allbusiness.com/banking-finance/banking-lending-credit-services-mortgage/11461606-1.html

[3] From the New Deal, a Way Out of a Mess: http://www.ritholtz.com/blog http://www.nytimes.com/2008/02/24/business/24view.html

[4] Long Term Policy Evolved By HOLC: http://spiderbites.nytimes.com/pay_1936/articles_1936_01_00006.html

[5] History and Policies of the Home Owners’ Loan Corporation: http://www.nber.org/chapters/c3204.pdf

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