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Breaking down the Fannie, Freddie wind down

Friday, March 14, 2014 - 02:34

Mar 14 - Work continues on plans to wind down government owned mortgage agencies Fannie Mae and Freddie Mac. Bobbi Rebell reports.

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Plans to wind down government mortgage agencies Fannie Mae and Freddie Mac continue to evolve. Lawmakers want to shield the public from the high risk of the mortgage market- the two agencies currently own or guarantee 60 percent of all U.S. mortgages. That's nearly 31 million home loans. According to the latest proposal, they would be replaced with a new government entity named the Federal Mortgage Insurance Corporation, similar to the Federal Deposit Insurance Corporation. Private investors would take the first 10 percent of any mortgage losses- before the government backstop would kick in. Strong loan underwriting standards would be built into the new system. Real Estate professor Susan Wachter of the Wharton School and UPenn explains: SOUNDBITE: SUSAN WACHTER, REAL ESTATE PROFESSOR, THE WHARTON SCHOOL AT THE UNIVERSITY OF PENNSYLVANIA (ENGLISH) SAYING: "The private capital providers would help discipline the market and would take the first losses from the risk of the investment in homeownership and specifically default risk which brought about the crisis that almost closed down the entire financial system in 2007, 2008." One question- whether enough private capital would flow into the markets to fully replace their footprint. It would also eliminate the affordable housing goals of the old agencies- replacing them with financial support for rental properties. Fannie Mae and Freddie Mac were seized by regulators in 2008- when loan defaults drove them towards insolvency. But since then they have become profitable again- in fact returning over $200 billion in dividends to the U.S. treasury. Professor Wachter has her doubts about whether the plan to wind them down really solves the problem: SOUNDBITE: SUSAN WACHTER, REAL ESTATE PROFESSOR, THE WHARTON SCHOOL AT THE UNIVERSITY OF PENNSYLVANIA (ENGLISH) SAYING: "The housing crisis was not made by Fannie and Freddie alone. They contributed but they did not create the crisis. The crisis certainly had other players that were a part of the undermining of the system including private label securities and this doesn't go there. So I have to say that it solves, again we have to see the details, but the idea of the plan taking the tax payer out of 100% backing that is a solution to the problem we have right now but to go back and to solve the bigger picture problem of how we prevent a recurrence of the crisis I don't believe this does that." While the government still has a controlling stake- how to compensate private shareholders is a big problem- the stocks plunged after the plans were announced earlier in the week, but have since stabilized.

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Breaking down the Fannie, Freddie wind down

Friday, March 14, 2014 - 02:34