In recent months, Americans have learned that their mortgage payments — kind of like their airline luggage — can go places they never would have imagined. A loan in, say, Sarasota, Fla., can be bundled with others and sold as a mortgage-backed security to an institutional investor in, say, Singapore.
This process helped generate a housing finance boom as investors around the globe snapped up just about any kind of mortgage that lenders could gin up. More recently, it has turned to bust as investors’ appetite for mortgage-backed securities has swung from irrational exuberance to abundant caution.
As other institutions pull back, however, Fannie Mae and Freddie Mac, the two publicly traded corporations created by the federal government to promote homeownership, are capturing a rapidly growing share of the housing finance market. In the final three months of last year, Fannie and Freddie were involved in $450 billion in new home loans, or about 76% of the mortgage business, up from just 37% as recently as two years ago. This year, that figure might top 80%.
While it is beneficial that someone is still pouring money into the troubled housing market, this concentration poses great risks to taxpayers that need to be addressed.
Fannie and Freddie have guaranteed $3.6 trillion in loans and mortgage-backed securities that they have sold to other institutions. They hold an additional $1.6 trillion themselves, bringing their total exposure to the housing market to $5.2 trillion. That, incredibly, is larger than the $4.5 trillion portion of the national debt that’s held by private investors. Should Fannie or Freddie run into trouble, the federal government would have little choice but to bail them out. With the government already sodden in debt, that is a risk to which every American is exposed.
If that is not cause enough for concern, consider this: These two companies are subject to almost no government oversight to ensure they don’t engage in reckless behavior. Their one overseer is an obscure, understaffed and hamstrung agency…
