Debate: Fannie Mae and Freddie Mac

Should Fannie Mae and Freddie Mac exist, or be dismantled?

Background and context

NYTimes Room for Debate series on this topic: In 1938, Fannie Mae and Freddie Mac were created to package and secure mortgage lenders' loans. Congress commissioned these two entities to package loans in a way that guarantees the purchaser the principle and interest back in whole. Congress commissioned the two entities to provide liquidity and stability to the loans. The government sponsored agencies also purchased some of these loans and included them as part of their portfolios. [1] Nine out of ten American mortgage loans are provided by Fannie Mae and Freddie Mac's services. During the 2008 financial crisis, their $5.6 trillion portfolio began to fail. As a result, the government bought them out to soften the banking crisis. The US Treasury recently introduced its plans to do away with the two firms. The government's stated intentions for closing down the entities are to rebalance the ratio of home ownership to home renting. BY 2016-2018, the Treasury plans to enact new regulations that create a smooth transition from a government-based economy to a private sector. [2]

Should Fannie Mae and Freddie Mac be dismantled?

Pro

There is no reason the government should be backing mortgage securities. In European countries where the government does not play any role in the mortgage industry, home ownership is higher. http://www.npr.org/blogs/money/2011/04/21/134863027/whats-next-life-after-fannie-and-freddie

Supporting Fannie Mae and Freddie Mac supports too big to fail banks. The guarantee that Fannie Mae and Freddie Mac was federally insured was false. However, by the government bail-out of the failure, the US government perpetrated the mentality that banks can issue irresponsible loans and not suffer the consequences. Barney Frank pointed out the fallacy of the government-backed guarantee: "There is no guarantee. There's no explicit guarantee. There's no implicit guarantee. There's no wink-and-nod guarantee. Invest and you're on your own. Nobody who invests in them should come looking to me for a nickel. Nor anyone else in the federal government." The only reason the government was inclined to support these two entities more than others was because of their INITIAL stable banking policies. Before the mid-2000s, they dealt with fixed, 30-year loans only AFTER documenting their employment, income, and a requirement of a down payment of ten to twenty percent.

http://www.npr.org/blogs/money/2011/04/21/134863767/self-fulfilling-prophecy-the-bailout-of-fannie-and-freddie

Con

Click "edit" and write arguments here There's too much debt tied up in Fannie Mae and Freddie Mac to dismantle the agencies. Half of our country's $11 trillion in debt is in these agencies. New institutions take too long to implement when we have such an extensive debt history with these two entities. http://online.wsj.com/article/SB10001424052748704509704575019162391608940.html

Fannie Mae brings unique mortgage securities to the table. Unlike other corporate security backing agencies, Fannie Mae proudly issues a third to half of their loans to low-income and middle-income people. Fannie is special because they offer the American dream to low and middle income Americans. http://www.npr.org/blogs/money/2011/04/22/134863603/kill-them-bury-them-the-rise-of-fannie-and-freddie

Pro/con sources

Pro

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Con

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External links