Fannie Mae, Freddie Mac and the U.S. Homeowner

Life, liberty and the pursuit of happiness: whether Jefferson’s original intent or not, many have come to equate the pursuit of happiness with the pursuit of property ownership. The national foreclosure crisis has offered a rude awakening from those dreams for many Americans.

Recently, according to Fox, Trenton Mayor Tony Mack’s home was foreclosed and Beneficial Mortgage won a judgment against Mack for $320,000. The Associated Press says the national foreclosure rate in July 2010 was one in 62 homes. While the Obama administration is attempting to restructure government-sponsored loans, many politicians are reluctant to endorse actions that would make it harder for homeowners to qualify for loans.

Fannie Mae and Freddie Mac

The two housing government-sponsored enterprises (GSEs) through which Washington delivers its housing policy and mortgage market intervention share the common mission of providing liquidity, stability and affordability to the U.S. housing market. Fannie Mae and Freddie Mac receive a number of regulatory and tax exemptions; they also receive federal backing. They are therefore able to be more generous when evaluating credit risk than what the private credit market would allow. In part due to what The Economic Times calls the “expansion of the housing GSE’s missions,” the national home ownership rate edged upward, reaching an all-time high of 69 percent by 2004.

Proposed Reform

The Economic Times states that U.S. Treasury undersecretary Gary Gensler was supporting legislation that could have significantly increased mortgage rates as early as March 2000. He wanted the Treasury to cut ties with Fannie Mae and Freddie Mac. Amid a hostile backdrop of company lobbyists, homebuyers spurred by the housing boom and their political representatives, the effort failed. Ten years later, the same hurdles exist to the change the Obama administration seeks as it addresses and attempts to fix the flawed housing finance system upon which the current crisis was constructed.

Government Oversight?

Treasury Secretary Timothy Geithner says the government plays a necessary role in structuring the reforms needed to cushion the economy. He believes the government can price a guarantee in a way that protects taxpayers and preventing a collapse in the housing market. Further, he questions whether the private credit sector could put in place sufficient safeguards in the home financing regime in order to avoid another crisis.

Government Exit?

Some in the banking industry disagree. Thomas Lawler, a former Fannie Mae executive (and founder of Lawler Economic & Housing Consultation in Leesburg, Virginia), challenges the very existence of an appropriate governmental role in the housing finance market. Alfred DelliBovi, president of the Federal Home Loan Bank of New York, says Geithner fails to say that the recent race to the bottom in credit standards was dictated by political forces concerned about future election campaigns. He predicts that the nation will see “a redesigned model that will involve the government and the private sector … [that] will work very well until someone comes along and pushes it further than it was designed to go.”

The reality is that the federal government is deeply involved in supporting home ownership, from the tax deduction for mortgage interest payments to subsidized loans for first-time homebuyers. In the last decade alone, Congress has three times attempted and three times failed to rewrite rules concerning the housing GSEs. Where previous efforts have failed though, the new push is set amid a two-year catastrophic collapse that has cost taxpayers $150 billion.

As lawmakers labor to find a long-term solution, some funding is being offered to a handful of the markets with the highest needs as a temporary fix. Adolfo Carrion, regional administrator for the U.S. Department of Housing and Urban Development, reportedly awarded $11.6 million to the State of New Jersey and several of its cities. The funding is intended for use in helping to stabilize devastated neighborhoods amid the national foreclosure crisis. While much of the money will go toward the purchase and rehabilitation of homes, some money can be used for down payment assistance and closing costs for low to moderate income homebuyers.

Homeowners who are struggling with their mortgage payments or have fallen into default should speak with an experienced lawyer about their options for avoiding foreclosure. If leaving the home is preferable, an attorney may also offer advice regarding how to minimize future liabilities after the home is foreclosed upon.