The American Dream Doesn't Need Fannie and Freddie to Survive

One of the core components of the idea of the "American Dream" has generally been ownership of one's own home. However, the recent announcement that Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) could be wound down in as soon as five years has led to some speculation on whether or not home ownership will remain attainable and affordable for the younger generations of Americans.


The importance of Fannie and Freddie
Love them or hate them, one thing is for certain: Fannie and Freddie ensure that traditional 30-year mortgages are readily available. They also help to keep interest rates very affordable, as the banks know that they aren't taking much risk, since they are guaranteed to get paid back.

The thought of Fannie and Freddie going away leads some people to believe that mortgages will no longer be obtainable for middle-class homebuyers, but this is simply not the case. Not only will readily accessible financing for first-timers remain, but the end of Fannie and Freddie could in fact be a good thing for home ownership in America and make it easier for first-timers to qualify for a mortgage.

The proposed changes and how they'll reshape the mortgage market
Basically, the biggest impact of the bill that was recently introduced in the Senate is that Fannie and Freddie would be wound down over a period of five years, and would replace it with a government-backed mortgage bond insurance system. Essentially, there would be a bunch of private companies that would continue to do what Fannie and Freddie are doing: ensuring that 30-year mortgages are available and affordable.

Why economists seem to be getting worried is that the new system, in an effort to encourage responsible lending and to protect taxpayers, will require the private lenders to absorb the first 10% of losses before the government insurance kicks in. It also eliminates the mandate that a percentage of mortgages go to lower- and middle-income Americans, which some fear will make homeownership inaccessible.

More lenders means a free mortgage market
The key point to remember here is that these are private lenders that will replace Fannie and Freddie, and plenty of them. Private companies exist for one reason – to make money. Increasing competition for mortgage originations will, if anything, increase the availability of affordable mortgages as these private firms compete for business.

Because some of their own money is at stake, it will create somewhat tight lending standards, but that's nothing new. Ever since the foreclosure epidemic, mortgage standards have been pretty high on a historical basis. Besides, tight lending standards means less foreclosures, which means a healthy real estate market whose prices are dictated by supply and demand.

The new guidelines actually FAVOR first-timers
There is one key point in the bill regarding lending standards that no one seems to be talking about. The new underwriting standards will raise the down payment requirement to 5% from the current 3.5%, except for first-time homebuyers. This may not sound like much, but it translates to a $4,500 difference on a $300,000 home. It actually gives first-time homebuyers an edge in affordability over those buyers who have purchased homes in the past.

A step in the right direction
While the details have yet to be finalized, the new bill is definitely a step in the right direction. It will create much more of a free-market housing finance system, while maintaining enough of a safety net for lenders to encourage availability of loans.

While it may make it more difficult initially for buyers with borderline qualifications, it will encourage a new version of the American dream: where younger buyers wait until they are ready to buy carefully and responsibly in a healthy real estate market.

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Comments from our Foolish Readers

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  • Report this Comment On March 29, 2014, at 10:48 AM, zachg wrote:

    Another foolish opinion. Open your eyes. Without Fannie and Freddie or at least one of them, it will have a long lasting negative effect on the U.S. and it's economy.

    Keep them or prepare for third world surroundings.

  • Report this Comment On March 29, 2014, at 2:37 PM, maestrolindo wrote:

    The United States doesn't need Fannie and Freddie? We will all feel pain from the economic consequences without them.

    But the Congress, the Treasury, and the FDIC need something exactly like Fannie and Freddie to replace them as soon as possible before the discovery process unveils more corruption and fraud.

    Bebasing our economy through compromising underwriting standards, coercion and intimidation of banks wary of conceding to dangerous lending practices, insider trading, shareholder rights, 5th amendment violations, not even following laws previously enacted regarding conservatorship such as the Housing and Economic Reform Act of 2008.

    The list goes on and on. This isn't about housing reform or 'protecting the taxpayer'. Government is doing a little CYA here with this proposal..

  • Report this Comment On March 31, 2014, at 3:22 PM, soad34 wrote:

    Just another fool!!!

  • Report this Comment On March 31, 2014, at 3:44 PM, bigjohn327 wrote:

    without f n f there will be no 4% thirty year maybe not even 6%,,,,would you tie up your money for 30 years at that rate?....

  • Report this Comment On March 31, 2014, at 3:45 PM, casahanson1 wrote:

    Foolishly in big at $1.03 and foolishly riding this one out with Bill Ackman... No way lawsuits will settle nor will congress get anywhere with new legislation otherwise they'd be bucking a 6 year trend of doing nothing...

  • Report this Comment On March 31, 2014, at 3:48 PM, sksen wrote:

    Yup. They will all be better off, not even trying to buy a house.

  • Report this Comment On March 31, 2014, at 3:51 PM, truthwillsaveus wrote:

    How monumentally delusional! The "private entities" that is The Banks have more lobbying power than God and would shoot holes in any regulations a new and completely unnecessary system just like they shot holes in Dodd-Frank and every other attempt to truly protect the nation from their unrestricted and largely unnaccountable greed.

    This article reflects such a widespread apathy and ignorance about the importance of keeping Fannie and Freddie intact. With common sense regulation a 75 year old economic engine must be preserved.

  • Report this Comment On April 01, 2014, at 4:07 AM, AmiNBayern wrote:

    What kinds of delusions about the banks does Mr. Frankel have here? ..."a new version of the American dream: where younger buyers wait until they are ready to buy carefully and responsibly in a healthy real estate market."

    You mean after those younger buyers might be making a six figure salary and by then too old to even think of starting a family, which is probably why they wanted the house in the first place?

    The banks are not going to let anyone have a 30-year mortgage.

    Because of marriage, I moved to a country where very few people can afford a mortgage. I do not want to see my own country in a similar situation because unlike Germany, we are not set up for it, neither in availability of clean decent places to rent, nor set up properly with our landlord-tenant laws. The U.S. is not ready to become a nation of renters and I hope we never have to.

  • Report this Comment On April 01, 2014, at 6:24 PM, pawncracker wrote:

    Too many ideological assumptions in this piece...

  • Report this Comment On April 02, 2014, at 11:58 AM, hikingviking wrote:

    Ever watch any old movies about how banks treated borrowers in the 19th and 20th centuries? If not do some DD on how banks treated borrowers before Fannie Mae and Freddie Mac. Banks make money. They make money in lots of ways but one of the most lucrative ways is in mortgage finance. If you are saying that the banks will be holding their paper, then the mortgage market will tighten in terms of lending to truly qualified borrowers. But many of the other components such as interest rates will rocket, liquidity will dry up, home prices will fall, building will slow, market will get really messy for years. You all are missing the point however, this whole issue is about power and control for votes. Elected officials need to appear to represent on the side of the 'working class' and 'poor' and they use and will continue to use Fannie and Freddie as monetary political pawns. If congress loses Fannie and Freddie what ever shall they do to control who gets easy money? We are way past rational monetary policy in America. Look at what the Fed Res. is doing since 2010. We are on borrowed time and the pyramid has to come down eventually. Buy gold!

  • Report this Comment On April 02, 2014, at 12:35 PM, infinitemf wrote:


    You seem to be totally missing the issue here.

    It is not about whether American Dream needs

    FnF or not.

    It is about rule of law and values enshrined

    in our constitution that have made American

    Dream possible.

    Is there a way you can justify your article

    based rule of law and constitution?

    If not, can you write an article like

    "The American Dream Doesn't Need

    rule of law and constitution to Survive"?

  • Report this Comment On April 06, 2014, at 11:57 AM, truthwillsaveus wrote:

    I am curious as to whether Matt's articles reflect ignorance or a hidden agenda. Either way it reflects badly on my high opinion of The Fool.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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9/3/2015 3:59 PM
FMCC $2.26 Up +0.01 +0.44%
Freddie Mac CAPS Rating: **
FNMA $2.36 Up +0.01 +0.42%
Fannie Mae CAPS Rating: **