Fannie Mae and Freddie Mac are the biggest underwriters of home mortgages
in the US. These entities do not lend money directly to consumers but instead, they
purchase loans from banks on the so called secondary market. The names of Fannie
Mae and Freddie
Mac are based on their corporate acronyms; FNMA (Federal
National
Mortgage Association) and FHLC
(Federal
Home Loan Corporation). Fannie
Mae was
founded in 1938, during the Great Depression, when millions of families
could not become homeowners
or faced losing their homes. In 1968 Fannie
Mae
was
partially privatized, and in 1970 Freddie
Mac was
created as a wholly pri-
vate company to improve competition. Since then, both are privately owned by
shareholders but regulated by the US Congress. They are also often referred to as
Government Sponsored Enterprises (GSEs), due to the fact that they have been created
to serve
a public aim and are exempt
from state and local taxes.
In addition their securities generally benefit from a state guarantee. Therefore
the GSEs are able to borrow money more cheaply than other banks. The state guarantee
plus the tax advantage are an indirect federal subsidy.
This
advantage is estimated
to be worth
about 6.5 billion USD p.a. In return, the GSEs were
expected
to
serve
‘public purposes’, including helping to make
home buying more affordable.
For many years there was significant political influence on this two major US
mortgage banks to provide cheap refinancing of mortgages to other banks by purchasing
so-called ‘affordable
loans’ to the lower
middle class. By expanding
the
type
of loans they
would
buy,
both were
hoping to spur banks to provide
more
loans
to people with less-than-stellar credit ratings.
In 1992 – under the Clinton Administration – the Department of Housing and
Urban Development (HUD) became the responsible regulator of Fannie Mae and
Freddie Mac. The Clinton Administration had a clear political agenda to put more
low-income and minority families into their own homes. In 1995 the HUD agreed
to let Fannie Mae and Freddie Mac purchase affordable-housing credit which included
loans to low-income
borrowers.
The
idea was
that this would
spur granting
of
loans and increased lending would
benefit many borrowers
who did not qualify
for
conventional
loans. The
agency therefore required Fannie
Mae and Freddie
Mac
to
purchase far more ‘affordable
loans’ made to these borrowers.
Since then the
GSEs
have
been supposed to buy a certain portion of ‘affordable’
mortgages each
year
made to underserved
borrowers.
In the 1990s the GSEs had already expanded homeownership for millions of
families by reducing the requirements for down-payments. Nevertheless, in 1999
Fanny Mae was facing increasing pressure from the Clinton Administration to further
expand
mortgage lending to low-
and moderate-income people and felt pressure
from stockholders to maintain its phenomenal profit growth.
For
example,
the
HUD requested that by 2001 50% of the GSEs portfolio should be made up
of
loans to low
and moderate-income borrowers.
At the same time HUD was
investigating
allegations of racial discrimination in the automated underwriting systems
used by the GSEs to determine the credit-worthiness
of credit applicants. In
addition,
banks, thrift institutions and mortgage companies had been pressing Fannie
Mae to help them grant more loans to subprime borrowers,
whose incomes,
credit
ratings and savings
were
not good enough to qualify for conventional
loans.
Source : Perguruan Tinggi Kedinasan
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