Financial Reform and Fannie & Freddie

July 1, 2010

During the course of fighting over financial reform many issues have made headlines. All sorts of concessions have been made in an effort to gain enough votes to get the bill passed, and as each concession is made, Wall Street wins and main street looses. However, Fannie Mae and Freddie Mac, the two government sponsored mortgage entities have managed to escape, and this is “upsetting” quite a few people. While Fannie and Freddie should be brought in the fold of reform, many are simply advocating their demise. But there are self-serving reasons the anti-Fannie / Freddie crowd want them gone.

Let’s get this one out of the way first.

The opponents to Fannie and Freddie have managed to garner a large following of commoners by pointing out that some people are getting government home loans at a low interest rate. And those of us who don’t qualify for a government housing loan and have to settle for a traditional loan don’t like the idea that we have to pay a higher interest rate while our tax dollars may be subsidizing others. Therefore we will be heard to yell out a big “YEAH!” when we hear someone on television advocating doing away with the government benefit. But are we stepping over a million dollar bill just to pick up a dime?

The answer to the last rhetorical question is a resounding “YES”. Although Fannie and Freddie don’t make what a regular mortgage lender makes, they actually earn a reasonable interest rate, which today is about 4 to 4.5 percent. But that can not be said about the loans the Federal Reserve makes to Wall Street banks. As this post is written, banks are paying the feds something less than one-half of 1 percent for money they are getting. And that loan number is in the trillions.

While financing home loans through Fannie and Freddie is costing the taxpayers something since we are paying more for the money we borrow than we’re charging, it isn’t anywhere near what the loans to banks are costing us. And the difference of what the home owners are costing us versus the banks more than makes up for the difference in the two loan amounts.

Now to the second reason the anti-Fannie / Freddie group wants the GSE’s done away with.

Banks are loosing money big time due to Fannie and Freddie. When banks pass a personal housing loan through to Fannie and Freddie, the banks receive about one-half of one percent of that interest rate for servicing the loan. But if they can keep the entire loan they make nearly ten times more.

So how about the fact that the banks need to sell the mortgage to Fannie and Freddie in order to get cash to recycle? No problem. They’ll simply borrow more cash for less than one-half of 1 percent from the Federal Reserve.

The bottom line here is that the crowd who wants to do away with Fannie and Freddie are the same one’s who think only Wall Street should prosper. Addressing whether or not the working class should be allowed to own a home if it requires getting assistance from Fannie and Freddie, CNBC’s Michelle Caruso-Cabrera was heard to say this week “I’m against it”. But she’s not against Wall Street banks getting trillions of dollars from the government virtually interest free. That pretty much sums up what the elite and their cheering section thinks about the working class.


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