Fannie and Freddie – What Went Wrong and Can It Be Fixed?

Ann Arbor, MI July 22, 2008 – “There are two main issues that need to be addressed regarding the problems being experienced by Fannie Mae and Freddie Mac,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.

Issue #1 - Short-term crisis
Fannie and Freddie currently purchase a whopping 68% of all new US home mortgages compared to 45% one year ago. This means that if they fail, nearly 70% of US home buyers would be unable to qualify for financing. “The declines in home prices we are currently experiencing would pale in comparison to the rapid free-fall in home values that would result if 68% of home buyers suddenly found themselves without funding options,” said Nicholas.

The carnage in the real estate markets wouldn’t be the only crisis facing consumers. Wall Street investors, financial institutions, mutual funds, foreign governments and wealthy foreign investors have long considered their investments in Fannie Mae and Freddie Mac to be super-safe. The turmoil currently being faced has totally hammered the asset values of Fannie and Freddie and put downward pressure on both their bond and stock prices.

“Accounting rules require financial institutions to reassess the value of their investments based on current market prices,” said Nicholas. “Every time asset prices fall, financial institutions need to raise more money to maintain their minimum capital requirements.” The downturn in Fannie and Freddie stock and bond prices has the potential to cause upheaval in financial markets across the world. “This pressure to raise funds and meet capital requirements creates a downward spiral in prices forcing financial institutions to continually sell even more assets into an already depressed market,” said Nicholas. “A bad situation quickly becomes even worse - this is exactly what has been happening among financial institutions since the credit crisis began in July 2007.”

Issue #2 - Long-term policy
Fannie Mae was created in 1938 as a government agency with a mission to buy mortgages from banks and issue bonds on the bond market using the pool of mortgages as collateral for the bonds. This process was designed to add liquidity to the mortgage marketplace and supply banks with extra funds that could be used to allow more Americans to buy and own homes. Fannie Mae became so successful and profitable that in 1968, the government decided to spin it off into a private, shareholder-owned company. In 1970, the government chartered Freddie Mac as another private, shareholder-owned company to provide some competition to Fannie Mae and further add liquidity, stability and affordability to the housing market. Since then, the companies have grown so large that they own or guarantee roughly half of all mortgages in the United States.

The main issue being faced by government officials today is whether it is wise or viable to have US taxpayers support the risky business practices of for-profit companies like Fannie Mae and Freddie Mac. Interestingly enough, Fannie and Freddie do not wish to be completely privatized. They have spent over $170mm on government lobbying activities since 1998. “Their preferred status and insider ties to the government have resulted in record corporate profits when times were good and a taxpayer-funded safety net when times are bad,” said Nicholas. “Just because the companies engage in a business that benefits the public, doesn’t mean that they deserve to be fully backed by taxpayers and the federal government.”

Nicholas and the CMPS Institute are among the growing number of individuals and institutions that have called for completely privatizing Fannie and Freddie and eliminating their ties to the government. “Breaking up the companies and completely privatizing them may very well be a viable long-term solution that could prevent a crisis of this magnitude from occurring in the future,” Nicholas said. “The delicate balance here is not to sow the seeds of next crisis while simultaneously preventing a full-scale meltdown of the US housing market and financial system.”

Members of the press can learn more about Fannie Mae, Freddie Mac and other current events in the mortgage industry by attending the upcoming CMPS event in New York City, July 28-30, 2008. The main presenter will be CMPS Institute Chairman Gibran Nicholas, and there will be a special real estate market forecast delivered by Dr. Lawrence Yun, chief economist of the National Association of Realtors. The entire event is open to the press, who can request complimentary attendance by registering here: http://www.cmpsinstitute.org/public/forecast


About CMPS Institute: CMPS is a training, examination, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. Recognized for its preeminence within the industry, the CMPS curriculum represents the core knowledge expected of residential mortgage advisors regardless of the diversity of specializations within the industry. Over 5,500 financial professionals have gone through the program since its launch in 2005. For more information or to find a certified professional near you, please visit www.CMPSInstitute.org or call 888.608.9800.