Yahoo! News – Fed Warns of Fannie, Freddie Risks

Yahoo! News – Fed Warns of Fannie, Freddie Risks
“Fed Board of Governors economist Wayne Passmore said on Friday Fannie Mae’s and Freddie Mac’s congressional charters — which grant them several advantages, including the ability to tap the Treasury for $2.25 billion each in an emergency — is worth billions to the companies…”

It sounds ridiciulous unless you look at the facts, but $2.25 billion is a drop in the bucket for Fannie or Freddie. Uncle Freddie is the smaller of the two and “Freddie Mac purchased $826 billion of single-family and multifamily mortgages in 2003…”

In the interest of full disclosure, Freddie Mac is one of my biggest clients. I sell most of their foreclosed properties in the area. On the other hand, hamstringing their role in the secondary mortgage market would only increase interest rates, make it harder to get new loans, drive down home prices and ultimately result in more foreclosures; so Passmore’s recommendations would lead to more business for me. So, I don’t have a bone to pick here personally, my involvement with Freddie Mac just gives me a bit more knowledge about the reality of the situation.

My best guess is that this Passmore guy knows that the ancient Alan Greenspan is going to either die, retire or quit to take the role of Dumbledor in the fourth Harry Potter movie and is banking on there being an antibusiness President when it happens.

The basic complaint is that investors in Freddie and Fannie make money. This is wrong how? Now granted, there’s a free market argument in favor of the companies never having been created in the first place. It’s not a good argument, since what these companies do is actually create the market; there was no market, free or otherwise, for mortgage loans before Fannie Mae. Leaving that aside, if they exist the measure of their success, since they were set up as for profit corporations, is not in successfully limiting their investors profits. The measure of their success, in terms of public policy, is in whether they accomplish their mission. Here are some facts:

Freddie Mac purchased 5,162,391 single-family mortgages in 2003.

Freddie Mac has financed homeownership for more than 40 million families since 1970.

Freddie Mac purchased one mortgage every 6 seconds in 2003.

Again, remember that Freddie is the smaller of the two.

No benefit to homeowners?

“In fact, because we lower mortgage rates by an average of 1/2%, we save a family about $12,000 over the life of a $100,000 loan. That savings adds up to $15 billion each year for homeowners in the conventional mortgage markets we serve, and allows more families to become homeowners. And lower mortgage rates mean lower mortgage payments, allowing still more families to achieve homeownership. A study released in 2001 details how we use our charter to save billions of dollars for homebuyer and renters each year.”

$15 billion a year in savings to homeowners and the cost is a $2.25 billion line of credit. If every government program worked that well think of it. We could eliminate most government social spending in favor of just loaning money to private sector entities. Instead of a now $400 billion, now $530 billion, now how many trillion dollar prescription drug boondoggle give the pharmaceutical companies a $2.25 line of credit and tell them their mission is to provide cheap drugs. Instead of food stamps, loan $2.25 billion to the farm co-op industry and tell them their job is to provide food cheap food.

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