Fannie and Ginnie Mae and Freddie Mac

By Tom Putnam | May 26, 2010

The "housing bubble/crisis" was created by humans, used by humans, and brought down by guess who? Who is actually responsible for this current disaster, which almost brought our entire economy down? Why humans, of course: the Congress, Wall Street, and those seeing an opportunity to quickly strike it rich.

Much of this began back in 1938: a very different time in the United States. The recession was still very much in existence. As part of Franklin Roosevelt's New Deal the federal government, wanting to increase the ability for low-income families to own a home, began a program that eventually became known as Fannie Mae: the Federal National Mortgage Association. In 1968, it was chartered by the Congress as a private stockholder-owned corporation, government-sponsored enterprise. This removed it from the federal budget's annual balance sheet, but its purpose remained the same: to enable low or risky income people to obtain a mortgage to buy a home and live the American dream.

After I finally finished my surgical residency and two years of active duty military service time required of all physicians in training, I moved to Rochester, N.Y., to begin my practice in pediatric surgery. My wife and I rented a home for the first year. We enjoyed Rochester and medical practice there, and believed it was time to purchase a home. This would be our first home purchase. I went to several local banks. They were very pleasant; but because I had some loans to pay off and no significant savings, they all refused. That was very discouraging, but growing up during the Depression of the 1930s, I understood the bank's position. However, I was very fortunate because my senior partner was well known in the city. I mentioned to him my lack of success in obtaining a mortgage. He made several phone calls to friends of his at local banks and I was asked to return. I was able to secure a mortgage on our first home at a 6 percent interest rate. By the time I needed a mortgage for our second home, I had enough financial strength behind me that there was no problem. Those were the ‘60s and early ‘70s. That was the financial atmosphere in the United States with a minimum of risk taking.

In 1968, another GSE was developed: the Government National Mortgage Association, or Ginnie Mae. It took over the responsibility that Fannie Mae originally had as guarantor of government-issued mortgages. In 1970, the government created the Federal Home Loan Mortgage Corporation or Freddie Mac. It was designed to compete with Fannie Mae and facilitate a more robust secondary mortgage market. They are all known as GSEs. Since their development, these GSEs have been the subject of continuing debate as to their real purpose, desirability, and relationship to the federal government. When the mortgage market collapsed in 2007, this debate truly became relevant. It seems to be true that these GSEs played an integral role in increasing home ownership in the United States to one of the highest in the world. The one really serious problem is that they became deeply involved in what is known as subprime mortgages. The latter are those issued to riskier borrowers: those that do not have sufficient equity behind them to be good risks for paying off their debt. (That was my situation in 1966 when I could not at first secure a mortgage.) That was the time when the federal government was not so deeply involved. That was the time when the market ruled.

However, as time passed and more subprime loans were issued, the housing bubble began. In the early 21st century, people found that they could make continuing profits be buying and obtaining mortgages on homes that they did not need and then reselling them at a higher price. They repeated that practice over and over, but it was short lived. The bubble burst in 2007. Whether these government inspired instruments were the cause or one of the initiators of the tumble of the U.S. banking industry and the U.S. economy leading to a world wide recession, the GSEs played a very significant role. One can laud the government's desire to enable home ownership for all of its citizens, but economic principles and disciplines were not followed and the results should not be surprising. Extreme risks were taken because all assumed that the U.S. government would step in and back these ventures. Too much government intervention and support will ultimately lead to citizen dependency and ultimately to catastrophe. The current evidence for that result is what is happening within the European Union with Greece on the precipice and Portugal, Spain, Italy and Ireland not far behind.

It is time to return to true economic principles and get national governments out of the equation. If governments can determine a means of oversight and education in economic matters without assuming responsibility for results, the free market may have its ups and downs; but it will follow economic principles that should sustain the markets and benefit all citizens.

Let's hope a lesson has been learned.


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