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

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.

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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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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 01, 2014, at 9:26 AM, smauney wrote:

    Everyone should read timhoward717(dot)com today. This will really get you up to speed.

  • Report this Comment On July 01, 2014, at 1:11 PM, FMCC2014 wrote:

    @ smauney

    Thank you for a site access very informative and easy to understand for newbie like myself....After reading an article regarding FMCC I am making my final decision to sell my 3000 shares and not to risk it further...I heard rumors and read many articles on this matter and this is it for me...criminals who run these agencies will do everything that suits them. Thank you again smauney

  • Report this Comment On July 01, 2014, at 10:01 PM, saintmarket wrote:

    So you think timhoward717 is more intelligent than Bill Ackman? Also with more resources than Bill Ackman? Also don't forget congressman also have friends and family with full access to the markets. They just need to bring the public impression that they want to erase fannies shares in order to be clear and avoid any further investigation. Is just a game where a lot of money can be made by being smart enough to cover the tracks. So don't be fool by some congressman or short sellers.

  • Report this Comment On July 02, 2014, at 10:09 AM, smauney wrote:

    Glad you like Tim Howard's blog. I never pay any attention to people making statements about their buying or selling activity. With over a billion shares in play - statements like 'I'm a newbie and I'm going to sell my shares' are just noise. However, it's America, knock yourself out. To the other post - I do think Tim has more knowledge than any Fool. As far as who's more intelligent? I don't think one's SAT/Mensa test scores have anything to do with anything. Very funny stuff.

  • Report this Comment On July 02, 2014, at 12:17 PM, smauney wrote:

    ...and of coarse the best explanation in 3 minutes and 49 seconds is on YouTube "Fannie Mae is profitable again" by Big Jam. Even Matthew Frankel could appreciate this little movie.

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