Fannie Mae and Freddie Mac

There was a time, not so long ago, when homes were being constructed at an unprecedented rate. Neighborhoods were booming and those who worked within the new home construction industry were thriving. Lending institutions were also the recipients of great success as they were seen as the providers of capital for the masses to purchase their dream home. Then, almost overnight, everything came to a screeching halt as the secret was out. Things were not as they appeared. Foreclosures began to rise and a crisis spread throughout the country. As we have seen throughout history, the federal government steps in to “save the day.” What was the federal government’s rendition of “saving the day?” It was to take over, run and regulate two giants in the mortgage world. The results of their efforts remain to be seen.

In 2007, the United States entered a mortgage crisis that affected the entire world. Greed and fraud played an important part in what was to be the beginning of the end of an era. Many individuals made money as a result of the mortgage crisis. Those who worked in the real estate business received huge commissions for their efforts in selling homes. Bank executives received huge bonuses as a result of the loans that were processed by their lending institutions. “Single-family housing starts declined by almost 42 percent during 2007” (Gabriel, Quigley, & Rosenthal, 2009, p. 1). For a time, it appeared that everyone who applied for a mortgage loan was approved. Loans were given on the assumption that the value of homes only goes up. This was not an accurate statement. Loans were also given to those with a less than stellar credit history. In the first few years just after the turn of the century, mortgage rates were historically low. This allowed people to borrow more money with a lower payment. Home prices also seemed to increase at a higher rate than in previous years. Momentum began to build as people were approved for mortgages they could not eventually afford and home prices were inflated to a level that was not to be realistically sustained. What followed was to be termed the “mortgage meltdown.” This created a whole list of problems for homeowners and lending companies alike. Some legislators at the time felt that the market should be left alone and that it would correct itself. This did not prove to be a true statement. Problems within the mortgage industry began to snowball.

These problems caused the federal government to intervene in an attempt to prevent an irreversible situation that may have devastated economies all over the world. Problems within the mortgage industry not only affect those directly associated with the industry. Those who work for companies who produce building materials, construct new homes and others are also affected. Fannie Mae and Freddie Mac are government-sponsored and government-regulated mortgage giants. They are backed by and controlled by the federal government but are not part of the federal government. Some say that the mere fact they are controlled by the government is proof that the free market has failed (Stanton, 2013). Fannie Mae and Freddie Mac were not always controlled by the federal government.

Fannie Mae and Freddie Mac are properly known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. In an attempt to help the failing mortgage market, the federal government initially responded by passing the Housing and Economic Recovery Act (HERA). This was signed into law on July 30, 2008, and temporarily gave the US Treasury unlimited investment authority in Fannie Mae and Freddie Mac (Frame, Fuster, Tracy, & Vickery, 2015). Its intent was to address the subprime mortgage crisis. The federal government hoped that confidence would be restored in Fannie Mae and Freddie Mac as they strengthened regulations dealing with mortgage lending and injected capital into the two lending giants. Less than two months later, their new regulator, the Federal Housing Finance Agency (FHFA), became guardian and protector of Fannie Mae and Freddie Mac. The Federal Housing Finance Agency took control of the two firms in an effort to curtail the impending risk of financial ruin and to conserve their value. Other components of the takeover included 1) replacing the CEOs, 2) eliminating the common stock and preferred stock dividends and 3) altering the financing and investing relationship between Fannie Mae and Freddie Mac with the US Treasury. “Fannie Mae and Freddie Mac were publicly held financial institutions that were created by Acts of Congress to fulfill a public mission: to enhance the liquidity and stability of the US secondary mortgage market and thereby promote access to mortgage credit, particularly among low- and moderate-income households and neighborhoods” (Frame, Fuster, Tracy, & Vickery, 2015, p. 25). On a more basic level, a description of how Fannie Mae and Freddie