Bloomberg reported today about the controversy of Fannie Mae and Freddie Mac, the government-backed mortgage giants, between Democrats and Republicans. Fannie Mae has declared in its mission that its "business is the American dream of homeownership" and set a goal in 2001 to help create 6 million new homeowners by 2014.
However, their target also caused them to invest in more loans that borrowers were unable to afford, which increased the amount of defaults and made Fannie Mae and Freddie Mac "low on money to honor their guarantees." As a result, The federal government, in turn, has taken79.9 percent ownership stake as it placed both companies in conservatorship. Thus far, these companies have cost taxpayers "$145 billion and counting."
The future of Fannie Mae and Freddie is currently being debated, with some Republicans arguing that the companies should be eradicated altogether while Democrats would like a more moderate reform. Republicans believe that the companies' goals to provide homes for low-income families "drove the financial institutions to ruin" and want the government to step back from the housing finance industry. President Obama and Democrats, on the other hand, believe that the government should support homeownership for Americans. In this case, the Bloomberg article states that the challenge will be balancing the two goals of allowing Fannie Mae and Freddie Mac to continue generating "fresh cash that can be channeled back into additional affordable loans" and maintaining less lax practices and "open-ended federal commitment."
One suggestion includes requiring mortgage lenders "who bundle loans into bonds" to contribute to an insurance fund in case of an emergency. Another possible way to protect taxpayers would be to bundle only loans into government-guaranteed bonds that are considered the safest. The Bloomberg article also states that the government should be more explicit in its backing of two mortgage giants, as oppose to federal officials saying they were not part of them even though investors assumed they were.
Meanwhile, Fannie Mae and Freddie Mac are making some reforms within themselves, such as removing owners who cannot afford their homes and Fannie Mae creating penalties for strategic defaulters. However, The New York Times writes that the scale of some of their efforts is small, and we can only hope that some effective reforms will be enacted soon.
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