Why you should consider Real Estate crowdfunding
May 11, 2015
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A No-Nonsense Guide to Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae are big names that you hear a lot in real estate, but many don’t fully understand what they are and what they do. If you’re going to become involved in real estate crowdfunding, then you’ll want to have an appreciation for these two companies and how they function in the real estate market. For this reason, we’re going to be exploring the two, which should hopefully give you a cursory understanding of what they are, what they do, and why they matter.

Freddie Mac and Fannie Mae Were Created By Congress

Of the two institutions, Fannie Mae was the first. President Franklin Delano Roosevelt, as part of the New Deal, introduced it to the American economy in 1938. When it was founded, Fannie Mae was a government-sponsored enterprise. However, Fannie Mae became a private company in 1968. In order to provide competition to the now private Fannie Mae, Freddie Mac was created by an act of congress in 1970.

What Are the Goals of Freddie Mac and Fannie Mae?

Although they are separate institutions, Freddie Mac and Fannie Mae have the same goals. They exist in order to expand the secondary mortgage market in the United States. They do this by purchasing mortgages from secondary lenders, which they then package together into mortgage-backed securities. Because they do this, secondary lenders are able to increase their amount of available capital, which in turn permits them to issue more mortgages to American consumers. In essence, then, the purpose of these two institutions is to provide the necessary economic situation for the average American to get a mortgage.

How Were Freddie Mac and Fannie Mae Affected by the Downturn?

The role that Freddie Mac and Fannie Mae played in the financial crisis of 2008 is a hotly contested topic. Depending upon whom you ask, you’re likely to get a different answer every time. However, the disagreement is not over whether or not the two entities played a role, but is rather about to what extent they played a role.

As far as their direct contribution to the financial crisis, you would have to look at both companies’ investment in subprime securities. A few years prior to the financial crisis, both companies become more heavily involved with these securities, and they came to make up a substantial part of their portfolios. As you probably well know, the crisis with these subprime securities is the root of the financial crisis overall. Both entities also contributed to the financial crisis by lowering their underwriting standards, which made them vulnerable to the fraudulent practices of a number of mortgage brokers.

All of that said, it is important to note that in the years that led up to the financial crisis, the role that Freddie Mac and Fannie Mae played in the United States mortgage market was severely diminished. This was due to Wall Street investors becoming more heavily involved with the purchase of subprime mortgages. While both Freddie Mac and Fannie Mae both certainly share blame for the financial crisis, it was ultimately this speculative investment on Wall Street, which remade the face of the United States mortgage market, that ultimately turned the economy on its head.

How Did the Government Bail Out Work?

Freddie Mac’s and Fannie Mae’s mismanagement in the years leading up to the financial crisis put them both in a dire position when the bubble burst in 2008. As the financial crisis deepened, both companies lost hundreds of billions of dollars due to the risky investments they had made, as well as due to the lax underwriting standards they had adopted.

Ultimately, this left the federal government with a dire choice, to either bail the companies out or to let them fail entirely. It was the consensus of leading economic thinkers that the failure of both companies would create even greater problems for the housing market and the United States economy overall. For this reason, President Bush had the federal government take charge of the companies, putting them in government conservatorship.

What Is the Current Status of Freddie Mac and Fannie Mae?

As part of the government conservatorship, a significant amount of taxpayer dollars were used to keep the companies afloat. This has, rather obviously, been a very divisive issue. However, had both of the companies been allowed to fail, things could have been much worse, and we likely would not be enjoying the current level of economic recovery that we are.

That said, the long-term prospects of Freddie Mac and Fannie Mae are sketchy at best. Since the financial crisis and subsequent bailout, both companies have stabilized significantly. However, there’s still quite a way for both of them to go. Further, current estimates hold that it will take well over a decade before both companies are in a position to repay American taxpayers.

Ultimately, the future of both companies rests firmly in the hands of the federal government. There have been significant changes to the economy in just the past five years, and it’s possible that a future administration may choose to revisit the topic of Freddie Mac and Fannie Mae’s necessity.

For example, a future Republican administration might move to privatize the mortgage industry entirely. Contrarily, a Democratic administration might seek to expand the role that these institutions and others play in the mortgage market, similar to what was witnessed with the passing of the Dodd Frank Act.

Continue Your Research

If you’re looking to become involved in the real estate market through crowdfunding, these are topics that you’ll want to pay attention to. What happens with Freddie Mac and Fannie Mae over the next decade will have far-reaching implications for the mortgage market and the housing market in the United States. So, as you look to add real estate to your investment portfolio, make sure that you’re staying abreast of the latest developments. Doing so will ensure that you’re always making the soundest investments possible.

 

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