Fannie Mae Eases Investor Rules

I have to wonder why have a limit at all, as long as the loans make sence. If the properties are paying for themselves and the owner has the proper reserves what is the problem.

The problem, as I see it, is that Fannie Mae was chartered to make homeownership more affordable and widespread. By subsidizing investors instead of single family homeowners, through the guaranteeing of conforming loans, Fannie Mae is driving up the cost of housing. This intervention then makes it more difficult for average families to afford housing.

Rather than relying on government sponsored tax dollars to prop up their investment activities, housing investors should be able to prove they deserve the banks’ mortgage money on their own merits. I suspect they will find that some banks are still willing to lend to them, just at a much higher interest rate.

But hey, who am I to blame someone for not turning down a government handout?

Fannie Mae was established as part of the New Deal in the 30′s in order to promote lending, when the markets froze up during the Depression. They have a screwy history as they’ve been a pseudo-government entity for some time. However, their primary goal is to make money, not to subsidize housing. While it could be construed that loosening some investor lending guidelines (while tightening others,) is “subsidizing investment,” I think that’s quite a stretch. The government has subsidized Fannie/Freddie in that they’ve back their illiquid paper, helping them to avoid collapse. However, they are no less expected to turn a profit now than they were five years ago. Loosening the maximum property guidelines while tightening the cash reserve requirement is, in my opinion, good lending practices that will ultimately help Fannie make money.

Here’s the history of Fannie/Freddie.

Fannie Mae, and similar agencies, insure mortgages. So long as they haven’t had to pay out on a massive scale, because of illiquid paper, the insurance end of the bargain could be safely ignored. Once the market collapsed, such as now, the unfortunate truth of the ‘implicit’ guaranty has to be understood. The US government is subsidizing a pseudo-private organization which insures mortgages. If you can get anyone to pay your insurance premiums for your car, health, or mortgage, then you are getting a nice subsidy.

I disagree with you on their primary goal. Yes, their stockholders want them to make money. No one else particularly cares about their stockholders. The US government is not giving them tons of cash to help the stockholders. The US government is subsidizing them to help the housing market. The GSE experiment started in the 60s should probably be ended, and the FMs should be renationalized.

While subsidizing investors in the housing market may shore up the apparently inevitable decline in housing prices, it does so by harming individual families. Their taxes are supporting Fannie Mae, which in turn is now supporting more investors, who in turn are inflating housing prices, keeping the individual families from affordable housing.

Fannie Mae does not insure mortgages. Fannie/Freddie purchase mortgages on the secondary market. Here’s a link. I think you’re confusing Fannie/Freddie with FHA (and FHA backed loans.)

Fannie’s primary goal is to ensure their stockholders realize a profit. That’s the primary goal of any publicly traded company. You’re correct in your assessment of the US Government’s motivation behind bailing out Fannie/Freddie (and the other banks.) It’s an attempt to avoid financial collapse, which would cause a housing (and stock) market crash. The real question is whether or not a semi-nationalized corporation should still be beholden to only their shareholders, or if US citizens’ best interest (the real shareholders) should be their primary focus.

The federal government did not dictate the change in lending requirements. It could be argued that the different requirements do not make it harder or easier for investors to obtain loans. While some investors can purchase more properties, other (cash poor) investors can purchase none. Again, my opinion is that this is a smart shift in lending guidelines.

I won’t address your last paragraph, as I don’t agree with your premise that this is a subsidy of real estate investors. As I said, that’s a big stretch.

I will propose a quick thought experiment to demonstrate my case:

Suppose that Fannie Mae did not exist. A corporation could then be formed by private investors to do the same thing, buy mortgages from banks and resell them on the secondary market. The catch is, of course, that they would not be able to do so at the same rate that Fannie Mae did because they were not backed by the government. To rephrase, if the US government were not involved in Fannie Mae then the investors in the secondary market would have demanded higher rates of return, and thus higher interest rates for mortgages, because of the higher risk in their investments.

Since the secondary investors knew that the US government was backing Fannie Mae, with the implicit guaranty that it would not fail, they could avoid risks in their investments. If you look at the definition of an agency that hedges your risks against potential losses, as the US government is doing in this scenario, you will see that they are insuring against potential losses. So technically the US government is functioning as insurance (for the secondary markets) in this case.

Fannie Mae has not always been a publicly traded company. It is now not even truly a publicly traded company, but rather a publicly traded GSE. As such, its primary duties are clouded by its history as a government organization (from the 1930s to 1960s) and then as a pseudo-company (1960s to present). The assertion that it functions more efficiently as a pseudo-company that issues shares has apparently been proven incorrect by its recent problems. Any real company in that situation would have failed and gone under, as the free market dictates. Thus my assertion that it should just probably be return to its original form, as a government organization.

Back to my original point, then: Without the US governments intervention and support of Fannie Mae, interest rates on real estate would be much higher because of the inherently higher risk in the investments. If they take away the government’s money, then you will have to pay more of your own money (in interest rates) to buy real estate. That seems like a subsidy to me.

Suppose that Fannie Mae did not exist. A corporation could then be formed by private investors to do the same thing, buy mortgages from banks and resell them on the secondary market.

Fannie & Freddie buy mortgages on the secondary market. They then sell (or sold) mortgage backed securities. There were/are private organizations that also did this. Here’s a cartoon that explains how this works, and what was wrong with the system. As you can see, Fannie/Freddie are not isolated as the only purchasers on the secondary market.

Since the secondary investors knew that the US government was backing Fannie Mae,

The US government did not explicitly guarantee any of the mortgage backed securities that Fannie/Freddie sold. It wasn’t until late 2008, when Fannie was bailed out, that there was an explicit guarantee of Fannie’s paper. The rates of return the investors realized were based on an assumed probability that the US would not let Fannie fail.

As such, its primary duties are clouded by its history as a government organization

I fail to see how an entity’s history clouds any obligation. If the USPS were privatized, and stocks were sold, whose best interests would they answer to? It becomes cloudy now that they have been bailed out. However, I fail to see how their actions indicate an allegiance to the taxpayer, rather than the shareholder.

That seems like a subsidy to me.

It’s a subsidy of both homeowners & investors. However, since Fannie’s primary motivation is to turn a profit, it’s an equal subsidy to whomever they feel will repay the loan. It would require more governmental control than is currently present in order to engineer a “no investors” rule of lending.

Thanks for clarifying Fannie Mae’s role. I have an admittedly imperfect understanding, but I try to improve it.

The bulk of my concern has always been as follows. Fannie Mae began as a government entity that became a government sponsored enterprise. They issued shares, but there was always the implicit understanding, and this has been acknowledged by every newspaper that I’ve read, that if they were in trouble, the government would bail them out. Its history as a government entity added credence (clouded its history) to the fact that the government would bail them out. As a result of this fact, which was later proven once the government did bail them out, they were able to lower the rates on mortgages (i.e. lower risk for secondary investors and thus free up mortgage money for the banks) available in the market.

Fannie Mae’s primary motivation should not be to turn a profit. If it were a private company, then I would totally agree with your assertion. However, it is not and never has been a private company. The government has always had a hand in its existence by insuring its existence. Thus the American public, as an invested party in Fannie Mae, should determine its course of action. It is disingenuous to the American public to take their money to support investors when those investors then raise the cost of living for the American public.

The net effect of changing the investing rules for Fannie Mae is to shift the government’s role, a tax supported role, from subsidizing individual families in owning a home to subsidizing investors in owning houses.

The government subsidizes many industries, so I can’t really blame real estate investors for wanting their cut of the government pork. I’m not sure, however, that propping up inflated housing prices through government subsidies helps the housing market in the long run.

And one other point I failed to make.

If the USPS were to sell shares, then they would still not be competing on equal footing with UPS or FedEx. Their history as a government entity would give them an unfair advantage in that marketplace, because it would be widely accepted that the government would support them in any sort of dispute.

This scenario is exactly the same as the one that played out with Fannie Mae. The invisible hand of the government gave it an advantage in the marketplace over private companies that did the same business. I suspect, and you can correct me if I am wrong, that this implicit support is the reason why Fannie Mae and Freddie Mac grew to be giant organizations that vastly dwarfed any of their private competitors.

Thanks for the conversation, I appreciate the dialogue.