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Daily Real Estate News | May 11, 2005
Ending Fannie, Freddie Portfolio Raises Liquidity Risk
Congress should tread carefully before prohibiting Fannie Mae and Freddie Mac from continuing to buy mortgages and mortgage-backed securities for their own portfolio. That's the message REALTORSŪ heard Tuesday from real estate finance experts who spoke at the 2005 REALTORSŪ Midyear Legislative Meetings & Trade Expo, being held May 9-14 in Washington, D.C.
There’s a great deal of uncertainty over what impact such a prohibition would have on mortgage market liquidity, experts said.
Congress is looking at ways to bolster regulatory oversight of the two secondary mortgage market giants, who are chartered by the federal government to create mortgage market liquidity by packaging mortgages into securities for sale to investors.
Supporters and critics agree Fannie Mae and Freddie Mac have played key roles in keeping mortgage money flowing for housing, even after big economic shocks such as the long-term capital crisis that hit Russia 10 years ago and the fallout from the terrorist attacks of Sept. 11, 2001.
But it’s not clear that these government-sponsored entities need to continue buying mortgages and mortgage-backed securities for their own portfolio—a practice that’s been growing for the last 20 years. The companies now own some $1.5 trillion in mortgages and mortgage-backed securities, exposing them to considerable risk should interest rates rise, said Peter Wallison, an analyst at the American Enterprise Institute. He also noted that taxpayers could be hurt if the government has to bail Fannie and Freddie out.
Wallison argued that the companies’ portfolio activity doesn’t add anything to mortgage market liquidity that couldn’t be accomplished by focusing solely on issuing mortgage-backed securities. Only shareholders and management at Fannie Mae and Freddie Mac benefit from the returns the companies get on their portfolios, he added. (These returns are achieved from the spread between what the companies pay in interest to sell bonds backed by mortgages and the interest rate on the mortgages they hold.)
But Richard Green, a real estate and finance professor at George Washington University, said it’s not clear that banks or other financial services providers would continue to buy mortgages in the event of another economic shock, as Fannie and Freddie have done in past crises. Consequently, it’s risky to tinker with the GSEs’ ability to keep operating that side of their business.
How Congress structures reform of Fannie and Freddie oversight is a priority of REALTORSŪ as they march up to Capitol Hill this week to meet with their members of Congress. NAR backs careful reform that allows the companies to continue buying mortgages and mortgage-backed securities for their portfolio while creating a strong regulator to watch over them.
—Robert Freedman, REALTORŪ Magazine Online
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