The Demise of Fannie Mae and Freddie Mac: Housing Finance Reform and the Potential Impacts on the Real Estate Market


Over the last few years, the Federal National Mortgage Association and the Federal Home Loan Corporation, commonly known as Fannie Mae and Freddie Mac (“Fannie” and “Freddie”) have been criticized for contributing to the housing bubble and the resulting economic meltdown. Regardless of whether such blame is rightfully placed, it is undeniable that Fannie and Freddie hold significant influence over the housing market and are often credited with helping facilitate the expansion of the secondary mortgage market and the popularization of mortgage-backed securities. However, as the economy crumbled in late 2008, Fannie and Freddie were placed into the conservatorship of the Federal Housing Finance Agency (“FHFA”), leading to a taxpayer-funded bailout of approximately $150 billion to date. Some experts predict that the final cost of the bailout could reach as high as $300 billion. This has understandably led to calls for substantial reforms in the housing finance market. Given the prevalent role that Fannie and Freddie occupy in the mortgage market, any reform of Fannie and Freddie has the potential to substantially impact the California real estate market and the economy as a whole. Some of the proposed reforms and their potential consequences on the housing market are discussed below.

The Rise and Fall of Fannie and Freddie

Fannie was created by the government in the 1930s during the Great Depression. It was initially established as a government-sponsored enterprise (“GSE”), but it became a publicly traded company in the 1960s. Freddie is also GSE, which was created in the 1970s to further expand the secondary mortgage market. In plain terms, Fannie and Freddie buy mortgages in the secondary mortgage market, pool them with other mortgages, and sell them to investors on the open market as mortgage-backed securities. This process allows the primary lender (i.e., the lender selling the mortgage) to reinvest those funds, thereby allowing the primary lender to make more loans.

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