Government Sponsored Entities (GSEs) Fannie Mae, Freddie Mac, and government-owned Ginnie Mae account for almost the entirety of the secondary mortgage market according to an article by Paul Muolo in the May 31st 2010 National Mortgage News. Although this doesn’t come as a huge shock, it truly illustrates just how dependent the housing market is on government support.
Ginnie Mae is entirely owned by the government, while Fannie Mae and Freddie Mac were seized by the government in 2008 in order to avoid insolvency. The mortgage giants purchase loans from mortgage servicers and originators in order to provide liquidity to the housing market and encourage home ownership and lending. Together with the Federal Reserve’s purchase of $1.25 trillion worth of mortgage backed securities, the GSEs helped keep the housing market afloat and mortgage rates low throughout the financial crisis.
The three mortgage giants had a market share of 98 percent of the secondary market in the first quarter of 2010, a decrease from 99 percent in the fourth quarter of 2009. Ten years prior, the three had a 55 percent market share. Fewer and fewer lenders are keeping mortgages on their own books, which illustrates just how little private capital exists in the housing market.
This also shows the enormous risk exposure the American taxpayers have to a downturn in the housing market, which is stabilizing but still in a very precarious position. So far, we have provided $145 billion worth of funds to Freddie and Fannie since their seizure. The Obama Administration pledged an unlimited amount of money to back the GSEs. If anything goes wrong, taxpayers are stuck with the bill.
There has been talk in Congress about privatization and/or unraveling the GSEs, but nobody has come up with a viable plan to replace them. The numbers alone show how vital they are to the housing market as currently constructed. If we wish to continue to subsidize home ownership, we need the GSEs, or something to fill their role in their absence.
What do you think we should do with Fannie and Freddie? Let us know in the comments section below.
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