Why We Need Fannie Mae And Freddie Mac

Fannie Mae (FNM) and Freddie Mac (FRE) are two of the most hated agencies on Wall Street. These quasi government agencies are blamed for much of the problems related to the housing crisis. They are criticized for backing risky loans and encouraging an environment of risk taking by guaranteeing liar loans. Many politicians and citizens have even called for the abolishment of both agencies. Although Freddie Mac and Fannie Mae may be terrible investments, they are a necessary cog in our economy.

Fannie Mae and Freddie Mac play a crucial role in our economy. They provide guarantees for most of the housing loans that are given to individuals for real estate purchases.

Here are a few reasons why these agencies are necessary evils.

Without these two agencies, homeowners would find it nearly impossible to get a loan. Banks would only lend money to individuals with excellent credit. This doesn’t mean that people with bad credit should get home loans but individuals with good credit should have access to funding. Banks would not take the risk of lending to individuals with good credit without federal backing.

There would be no more long-term mortgages. Lenders would not grant 20 or 30 year mortgages to borrowers. Loans would be much shorter in term length. Banks look to make a quick profit and would not tie up their funds for such a long period of time. For example, a 10 to 15 year loan would be favorable financially to borrowers over the long run but would constrict the number of borrowers looking to borrow.

These two agencies have actually helped bail out the banks indirectly. The billions that have been pumped into Fannie and Freddie have been paid out to cover losses on mortgages granted to national and international banks. The banks would have been sunk if Fannie and Freddie had gone under. The $150 billion dollars in taxpayer bailouts will never be repaid but has helped to stabilize the United States economy. The entire mortgage market would dry out without the government aid.

What do you think should be done with Fannie and Freddie?

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