Is Disaster Looming For Fannie Mae And Freddie Mac?
April 20, 2000
A downturn in the nation's housing market could have serious implications for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. -- known respectively as Fannie Mae and Freddie Mac.
These quasi-government institutions -- which deal in mortgages on homes -- have spectacularly expanded their borrowing and lending activities in the past few years. Critics charge that they are over-extended and if they fail, the bill will dwarf taxpayers' bailout of the savings and loan industry.
- The agencies have been increasing their lending at a 20 percent annual rate in the past couple of years.
- The two agencies already have combined debts of $1.4 trillion.
- If current trends continue, they will be bearing some of the risk on half of America's residential mortgages by 2003 -- compared to one-third in 1995.
- The agencies have roughly $32 of debt for every $1 of capital -- compared with $11.50 of debt per dollar at large banks.
Their implicit government guarantee allows them to borrow more cheaply than private banks. And they have an emergency credit-line from the Treasury of $8.5 billion -- so far unused.
Although Fannie Mae and Freddie Mac protest they are private concerns, official reports have concluded that their quasi-public status represents a subsidy worth about $6 billion a year. According to reports, as much as one-third of that subsidy ($ 2 billion) is not passed on to mortgagees -- but goes to the agencies' shareholders and employees.
Their recent expansion has caused the American Enterprise Institute to warn that they are out to "nationalize" the residential mortgage market.
Source: "Homesick Blues," Economist, April 15, 2000.
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