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A Milestone for the Housing Industry: Replacing Fannie Mae and Freddie Mac

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A new bill proposed on Tuesday hopes to remake the role of the federal government in mortgage finance. According to an article by Reuters, a bi-partisan group of senators are working to abolish Fannie Mae and Freddie Mac in an effort to replace them with a government reinsurer of mortgage securities.

Due to the housing crisis in 2008, the government took control over Fannie Mae and Freddie Mac by spending $187.5 billion to keep both enterprises from sinking. However, the role of this new entity, the Federal Mortgage Insurance Corp., would be to provide a soft cushion for private capitol in crisis.

Many analysts and industry professionals alike believe this effort to be an important milestone. The reason being is that: 1. it lessens the footprint of the federal government, 2. it keeps the housing industry in a liquid state, and 3. it jumpstarts the long-over debate over how to remake this totally flawed finance system.

And what does that mean for the relationship between private entities and mortgage lenders?

According to Reuters, it would “require private entities to buy mortgages from lenders and issue them to investors as securities,” with an additionally prevision that: “Private equity would be required to absorb a 10 percent loss of the principal underlying those new mortgage-backed securities if the loans went bad.”

It  is often said that the hardest part of the journey is taking the first step, and this statement couldn’t be more true. Although this initiative represents a large step forward in the government’s response to the housing crisis, analysts, however, caution that this first step will simply be one of many in an uphill climb in Congress.

“Any proposal that clears the Democrat-led Senate would have to win approval in the Republican-controlled House of Representatives, where some lawmakers want a fully private system,” report Reuters. Many critics believe that this particular bill has “zero chance” of passing as is, but the Obama Administration is welcoming the effort and is willing to work with the House and Senate on creating a comprehensive, bi-partisan revamp of the current system, which will probably take years to accomplish.

Personally, they shouldn’t done this a lot sooner. But better late than never.

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