The Treasury Department last week altered its financial support of Fannie Mae and Freddie Mac. The revised terms are that the guarantees of how much the Feds will back them are going down, but officials say the amounts they are still guaranteeing will be plenty. More importantly, there will now be no dividend that Fannie Mae and Freddie Mac has to pay. The new terms are that whenever there are profits they will simply be swept over to the Feds; and losses will still be covered by we the people.
Prior to this change, since there have been no profits for the most part in the last four years since this takeover of Fannie and Freddie began, Fannie and Freddie have had to borrow money from the Treasury (i.e. we taxpayers) to make their dividend payment. Now the requirement is simply that there is no dividend payment required, and when there are profits those will be sent directly to the Treasury as part of paying back all the losses the Feds have covered for these two money-sucking machines.
So now that the Feds won’t require payments in quarters when the firms lose money, this will end a ludicrous cycle where Fannie and Freddie were borrowing from the government simply to make quarterly dividend payments.
A senior Treasury adviser, Michael Stegman, called the move “the next step toward responsibly winding down the two mortgage-finance firms”. Republican critics say the move will do just the opposite, and they are upset that the Obama administration does not seem to have a plan to overhaul the mortgage finance system. Seems like there is some political conflict here. One representative, Scott Garrett (R., N.J.), wants to eliminate Fannie and Freddie and remove most federal backing from the mortgage market. Sure thing, make the heroine addict quit cold turkey…that always works.
Fannie Mae and Freddie Mac have been subsidizing mortgages for almost eight decades, Fannie Mae since the 1930’s and Freddie Mac since the 1970’s. You can’t just pull the plug all at once, which in my opinion would wreak havoc on housing prices and mortgage lending.
However, taxpayers have paid a total of almost $188 billion into the companies so far. I am sure it will go higher. We can’t cover their losses forever. Luckily, both companies have started reporting profits in recent quarters after years of huge losses. They have been helped by stabilizing home prices and more strict underwriting requirements.
So the summary is we have two entities that have lost staggering amounts of money, who have changed their underwriting guidelines to levels of near torture, these firms have become a political football for the left and the right, and I get screamed at daily by consumers wondering why in the world the process needs to be so complicated and they have to provide so much paperwork that covers every bit of minutia in their financial lives.
Yup, sounds about right, typical outcome when big government gets involved in “fixing” something. The next time you want to complain about the mortgage process, call your government representative.