After weeks of delays, the Senate finally passed a version of the financial reform bill designed to prevent a future Wall Street crisis from wrecking the world's economy. While some of the bill's language requires lenders to better assess each borrower's ability to repay a home loan, the new legislation does nothing to address one of the mortgage market's biggest dilemmas: what to do about Fannie Mae, Freddie Mac, and other government sponsored enterprises (GSEs)?
Aftermath of a wild ride
Fannie Mae (FNMA) and Freddie Mac (FHLMC) offer a financial safety net to mortgage lenders. A recent Reuters report estimates that those two GSEs alone underwrite over half of the current $11 trillion in outstanding American home loans. During the housing boom, low mortgage rates and rising real estate prices drove GSE profits sky-high and their stock prices soared. Investors, not taxpayers, carried most of the burden of insuring the new and refinanced home loans guaranteed by GSEs. Today, Fannie and Freddie trade as penny stocks mostly repurchased by the government, which now must use taxpayer money to repay cash borrowed through bond offerings.
Mortgage lenders fall on tough times
Analysts who once worried about the $109 billion the U.S. government spent to bail out major banks under the TARP program cringed at the recent Congressional Budget Office estimate that taxpayers may have to sink another $373 billion into GSEs before 2020. Without that support, Fannie Mae and Freddie Mac won't be able to underwrite home loans for mortgage lenders, no matter how attractive mortgage rates become. An already overburdened FHA currently guarantees nearly a third of American home mortgages, and a tepid lending market has focused on refinancing home loans for property owners with excellent credit.
Fannie and Freddie still in limbo
Lawmakers admit that they may not even be able to come up with a consensus on what to do about GSEs until early in 2011. The results of mid-term elections will shape the direction Congress takes, with Democrats leaning toward nationalizing the agencies and Republicans advocating a return to privatization. Even with mortgage rates near generational lows, the health of GSEs like Fannie Mae and Freddie Mac, or their successors, will determine whether mortgage lenders can deliver on the promise of a sustained recovery in the real estate market.