Should The U.S. Keep Fannie Mae And Freddie Mac Alive?

Investors have their own set of reasons why Fannie and Freddie should stick around, but there is another reason to keep the agencies open. It's good for the fragile U.S. housing recovery.

Jul 1, 2014 at 6:00AM

Efforts to wind down Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) and to reform the housing finance system have been under way in the U.S. Senate Banking Committee for some time now.

Fannie Mae

Whether the potential elimination of Fannie and Freddie would be fair to investors is a frequent topic of heated debate, and currently is the subject of several lawsuits.

However, there is another reason closing the doors to the agencies might be a bad idea. Both companies do a lot to protect the very fragile U.S. housing recovery, and a solid plan would need to be in place to provide similar services to homeowners.

Since the mortgage crisis...
According to the Federal Housing Finance Agency's (FHFA) quarterly Foreclosure Prevention Report, Fannie and Freddie have completed more than 3 million preventative measures since 2008 which have allowed about 2.6 million borrowers to stay in their homes.

Loan modifications have been given to 1.6 million borrowers, which include rate reductions, longer loan periods, a partial reduction in principal, or some combination of the three.

And the point to keep in mind is that a lot of this activity is still going on.

While the nearly 89,000 preventative actions during the first quarter of 2014 is a much lower rate than in previous years, it is still a very significant amount. Almost 15,000 short sales and more than 47,000 foreclosure sales occurred during the quarter, and while foreclosure starts decreased 25% in the quarter, we are still seeing some lingering effects of the mortgage crisis.

What would take Fannie and Freddie's place?
This is the billion-dollar question.

If there is another system put in place to assist struggling homeowners who are facing foreclosure, it may not be such a bad thing to reform the housing finance system.

Under the current Senate proposal, Fannie and Freddie would be wound down over a period of five years, and this time frame could be extended in order to prevent rate spikes or other instability in the housing market.

The agencies would be replaced with a somewhat elaborate system of private firms and a central federally backed agency which would insure mortgages but would require the private firms to absorb losses as well in the event of a mortgage's default. This definitely seems like a solid system to prevent future bailouts and to encourage responsible lending, but the question remains of who would help existing homeowners struggling to stay in their homes.

In the hardest-hit states, foreclosure backlogs are enormous and the process itself can take years. There is no way of knowing when the fallout from the crisis will be over.

Still a long way to go in recovering
The housing market has certainly improved over the past several years, but the recovery is still quite fragile.

Nearly 4% of the loans serviced by Fannie and Freddie are in some stage of delinquency, and 2.2% are seriously delinquent (90 days or more). This is much improved from the delinquency rate of over 7% we saw in 2010, but it still represents more than 1.1 million home loans.

Plus, some states are much worse off than others. Florida, New Jersey, and New York all have serious delinquency rates of 4% or more.

The ability to prevent a good portion of these from entering foreclosure could make a big difference to the overall housing market.

It makes me think...maybe we should keep Fannie and Freddie around for a little while longer.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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