What Will Happen to the Mortgage Finance System?

by | BiggerPockets.com

There has long been a general feeling that the American residential property sector is broken overall. While there was a sharp rebound in home sales once consumer confidence recuperated in 2013, we’ve seemed to have nevertheless hit a rut where the housing market is stalling.

However, with recent attempts from Capitol Hill to reform the home lending process, there are some concrete areas that probably need reform. According to a new report from Reuters, the Senate Banking Committee could approve a bill to disassemble Fannie Mae and Freddie Mac. The ultimate endpoint of this bill would be to replace the two loan bodies with a transitory agency that provides a government mortgage guarantee that will only be offered once losses are handled by private finance entities.

It’s a convoluted process, even by the admission of those who’ve been watching its passage most closely.  The Reuters story quotes the standing president of the Mortgage Bankers Association admitting, “This is complicated legislation”. The ultimate goal rests on doing away entirely with wing of the government that was propped upped during the bleakest period of the recession. There seems some contention that both agencies are doing more harm than good at this point, and that transitioning to private sector management would foster a culture of deeper accountability.

So What Would Happen if They’re Shuttered?

The Reuters article points out that during the depths of the recession Fannie and Freddie lost the government a net  $187.5 billion in taxpayer funds. We’ve reached a point where the agencies have rebounded to profitability, and have returned more profits in dividends than they once took away as bailout aid. That being said, their flailing during the recession and danger to the U.S. Treasury if things go south has many within both the government and private interest looking for a better solution.

But the other side of the coin isn’t completely safe either. There seems concern that pushing assets held under Fannie and Freddie into private ownership could compromise the paths to affordable housing for lower-income families. Alternately, it could lead to certain players gaining too strong a foothold across various services in the loan management process. In the case this slows home sales too drastically, it could undercut the housing recovery or destabilize home values.

Ultimately, the impact on the housing market for better or for worse will spring from the details of the bill itself. Current plans lay out that both agencies will be disassembled within five years of the bill’s passage, so we’re not slated to see a rapid transition. Ideally this will allow for financial adjustment and for potential errors in judgment to be curbed.

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.


  1. Who knows. Maybe families will be able to just pay 30% of their income, and the government will go into neighborhoods, do eminent domain to give away homes to these people. We could have housing agencies either be the landlords, or help provide assistance to the families to maintain the property.

    It would make more neighborhoods ‘equal’, where low and high income families live next door to each other. Crime would be better dispersed, so that low income neighborhoods do not have so much of it and those neighborhoods continue decline. It would be a great nation, where everyone is equal.

    OR, we could just let the private sector work, as it has been. And have ups and downs, just like we have. The system is not broke, banks got too speculative, assuming the RE market was going up forever, and based their foreclosure numbers on that. They ‘knew’ that people would not pay, but they would re-coup the losses after the property increased in value.

    The banks should have went broke, just like any other investor.

  2. Sharon Tzib on

    What exactly are they trying to fix if they shut down these agencies? I’d like some more details on that. And it’s a tad bit comical that just because housing sales have stalled in many parts of the country that they’re calling the system “broken.” There’s more to the slow down than just lending practices.

    And I agree with Eric. If my small business had run into the ground because of greed and poor management, I certainly wouldn’t have been given a bailout. The banks shouldn’t have been given one either.

  3. I think doing away with Fannie and Freddie would be a big problem. The last time the private secror took charge in this arena there were huge problems and unfortunately fannie and freddie were also riddled with fraud and relaxed standards and guidelines. I believe we have gone too far on the regulatory side for mortgages at this point but it will be a little while yet before the pendulum swings back.

    My biggest concern with dissolving Fannie and freddie is right in this article. The Federal government proped them up during the downturn to the tune of nearly $190 billion. Who else would or could do that? The housing market needs entities su h as fannie and freddie in order to satisfy demand during all economic cycles. As the article stated the federal government made their money back and then some (which is good in some ways but the federal governments (in its role as the monopoly supplier of the US Dollar in a fiat monetary system) role is not to make money off of the private sector but rather to maintain and foster an environment that the private sector can thrive. I definately think reforms can be made to Fannie and Freddie but the basic structure is sound.
    I understand the moral hazard arguement and steps can be taken to prevent abuses. However I stongly believe America as a whole has become incorrectly focused on trying to make the federal government be “responsible” like an individual or business when it operates fundamentally different in its role in oir monetary system. What our focus should be on is the steps needed to foster a robust and thriving private sector in the US.

  4. I think everyone understands there is a problem with our financial sector, but all the main stream news outlets are too chicken to call it out.


    Do we need it? Obviously there was a need to centralize and organize financial practices in the early 1900s in order to stabilize the markets while in infancy but do we still have that problem with the technology and market climate available to us today?

    The educational level of average americans today well surpasses those of previous generations as College and High School has become an integral part of becoming a functioning member of civil society.

    I argue that we no longer need this ridiculous institution which prints money without regard to AMERICAN economic health but for its own survivalist agenda. Case in point is the MULTI-TRILLION dollar bailout to foreign corporations and banks during the 2008 crisis. if your interested you can read more about it here… http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/

    Who is on the hook for this corporate welfare program? American citizens and our children for generations to come.

    Fun website about FED money printing, http://demonocracy.info/infographics/usa/federal_reserve-qe3/money_printing-2012-2013.html

    Lets take a look into how money is made:


    Now tell me… do we really need a private entity charging us to make OUR money? The current system is one of oppression, constant work to pay off debts that can never MATHEMATICALLY be paid off.

    The tower of debt is teetering, I wonder where and when it will fall.

    Until then, hit me up in NYC .. I have deals =)

    • John, I could go point by point but if you truly believe that our children and grandchildren are somehow on the hook for the national debt, then it is painfully obvious that you do not grasp the operarional realities of our monetary system. Unfortunately you are in the majority and we as a nation force pain where it isn’t needed under the idea that we need to. Do you really think that our path isn’t sustainable? Really. The nation has been injecting assets into the private sector (I.e. taking on national debt) for the vast majority of our history. In fact the 7 instances in US history in which the US ran a federal surplus, each one of these events where immediately followed by a recession or depression, because mathmatically there is no other way. We are a trade deficit nation and as long as we remain one the federal government must run a deficit in order to allow the private sector to achieve its goals and growth.

      • John Casper on

        Im sorry Kyle but I don’t understand your point as written. Past the financial terms you are equating debt (deficit) with proesperity (private sector growth) as if one cant be had without the other.

        They are quite paradoxical terms but I do agree, we need debt. My point is that we must consider this current practice of the way OUR money IS made or should I say CURRENCY is made and the simple fact that we are getting ripped off by this private institution which is desperate to keep the dollar from falling off of world reserve status.

        Lets consider the fact that this one bank controls the entirety of the American economy and it’s first audit came in 2010 due to pressure from the senate after the 2008 crisis.

        Also consider that they are a PRIVATE institution tasked with setting monetary policy for this country.

        In 2008 the banking industry suffered a tremendous shock that showed the realities of our fiat CURRENCY system. The collapse of Lehman Brothers was largely considered the catalyst to the liquidity blockage.

        At the time of bankruptcy in 2008, the firms capital/equity was 3% of its total assets.

        Now consider the fact that the FEDERAL RESERVE BANK (PRIVATE & CONTROLS US MONETARY POLICY) has a liabilities sheet of assets to debt ratio of !!!!1.53% !!!!!as of AUGUST 2013. That means that for every MILLION they have loaned out, they have $15,300 in ACTUAL MONEY in ASSETS which gives them WORTH.

        This metric was measured before they “tapered” the $80,000,000 dollar MONTHLY BUYING SPREE of mortgage DEBT to the current 45,000,000 dollar monthly liquidity dosage.

        I don’t think you watched the video concerning the FED and how it works.

        Please don’t tell me I don’t “grasp” the subject. I don’t think you do.


        Time to wake up and smell the DOLLAR COLLAPSE. 

        • Sorry I didn’t cath your reply sooner. You are right I did not watch your “how the fed operates” video. I did now and it is exactly what I expected. Some of the information aludes to the sectoral balance approach in which I pointed to earlier but the video just said “it didn’t work”. It also failed to mention that 95% of the Feds profits go directly back to the US Treasury. The conspiracy theorists out there always forget that important fact. Another point is looking at economic volitility pre and post 1913 (fed start date). Our economy is much more stable since the fed was born and increasingly so according to the hard data. Lastly the #1 favorite anecdote that the FED haters role out is that the US Dollars has lost 98% of its value since 1913. This is looking at just one side of the equation. It completely ignores the value side, the standard of living has increased much more over the same period of time. I would much rather live today with $50,000 than in 1913 with $10,000,000. I can wash cloths quickly. Shower and use the restroom in the house. Talk to my friend on the otherside of the globe instantly even see them. I can travel anywhere as a middle class citizen. I can be cured of many diseases where as I would have died then. Life is a lot better now.

        • http://pragcap.com/how-the-economic-machine-works-by-ray-dalio

          Here is a video from me that I think you would enjoy. I used to have the same thought process as you and Dennis. The sad thing was that there was nothing but pain. There had to be another way. I searched and searched and one day stumbled onto pragcap.com. I gave it an hour a day for a month (sometimes more). I figured what is the worst that could happen? This turns out to be a swiss cheese theory but because I learn it I can easily debate folks who espouse it. Well I could not find any glaring holes. Things started to make sense. Like why Reagan was oversaw such a robust growth in the economy. He ran the debt up like crazy!! He chose to spend it on tax cuts and prudent reforms which was a lot more effective than many of the spending choices today but I digress.

          You compared Lehman Brothers to the FED and you would see how operationally these two entities are completely different. The FED is a currency issuer whereas Lehman like you, me, states and businesses are all currency users. Give it a shot. You guys see that there is nothing but doom with your current understanding. Would it not be fantastic to see a bright future? I for one have invested a hell of a lot better with the understanding I now have. I am not afraid in the slightest of hyperinflation that folks have been calling for for half a decade and running now ( who am I kidding, longer than that, remember the $35 billion “stimulus package” when Bill clinton took office that was gonna tank the economy and drive inflation through the roof, most don’t). I am confident in my interest rate outlook for mortgage rates and can efficiently plan my Dollar purchases. I don’t have a fear of China and actually understand that if the majority of Americans saw the powerful position we are in we would tell China they could not buy Treasuries on the primary market that it would hurt them but have no negative effects on us. China isn’t rich, they are mearly stuck with US Dollars from their trade surplus with the US and since they can’t build roads or pay workers with it they need to put it in the bank (I.e. buy treasuries). Especially since this prolongs their ability to remain an export based nation as they slowly transition to a more developed country with a larger middle class.

          Lastly I apologize if I offended you. I get extremely frustrated by this topic as so many people are as bullheaded as I once was. I really just hope you guys take the time to look into it. You will learn a lot regardless and in the end if you see it through, you might be able to sleep as well as I do having a little better understanding and knowing that life as we know it will not come to an end!!

      • Kyle, the entire system will soon be resetting “if” the USA loses the world’s reserve currency status. Will the world end? No, but the USA will change from what it has been for the last 100 years. Look to Great Britain in the 1970’s for what will happen here.

        If by our spending today the purchasing power of our money is decreased in the future, would this not be a hidden tax on our children and grandchildren’s future, so in fact they will be paying back our debts? I would make a prediction, our generation will be paying for this spending long before our grandchildren get the opportunity.
        There will be no economic recovery until interest rates are allowed to rise, who would lend money to start a business (major risk) with only a few percentage of return?

  5. How about the government get out of the economy in total, let the free market deal with housing. I’m trying to figure out who would lend anyone $300k for 30 years with 10% down based on two incomes, for 4 % interest? As the easy money is infused into the market the housing prices go up to match. Would it not be better to have private lenders make lending decisions, that if made wrong would put their bank out of business?

    If the above happened most would be renters (good idea) the price of housing would be cut in half as would rents. There would be blood however, but either way there will be blood at the end of this fiat system.

    • Dennis, I agree that we must put an end to the corporate welfare system we currently have in place.

      But unfortunately the system as it is currently structured is rigged towards those with the deepest pockets. Therefore what’s good for the country will never supersede what’s good for the elite. In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer. – credit – http://www.forbes.com/sites/laurashin/2014/01/23/the-85-richest-people-in-the-world-have-as-much-wealth-as-the-3-5-billion-poorest/

      If we were actually a democracy we would have done what Iceland did to recover post 2008.

      • John, we are not a democracy, which is rule by the people or mob rule. The reason the USA is toast is because we were founded as a constitutional republic, where a Bill of Rights spells out the limits of government, while guaranteeing liberties of the people. The Constitution is the supreme law of the United States.

        Both of these essential documents have been ignored as government on all levels has ignored these documents and in doing so taken away the basic freedoms afforded the citizenry.

        As a boat heading to a high water fall, we look to be moving along faster and faster, but the point of no return has come and gone. All that is left is to go over the falls and hope when we rise to the surface there will be some semblance of normal life. There is a reason local police and sheriff departments are being militarized, the folks at the top know there is only going forward and they want to still be in control when the smoke clears.

      • I really liked that article when it came out as well. People didn’t seem to like it when I pointed out that I have a net worth more than the poorest 1.5 billion people combined as well. You take into account the vast amount of people that have a negative net worth and it takes a while to cancel out those folks with no to a small net worth. I won’t be on the Forbes list anytime soon either 🙂

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