Back in late 2007, the housing bubble began bursting. Less than a year later, both Fannie Mae and Freddie Mac had seen such heavy losses that they were placed into conservatorship of the Federal Housing Finance Agency—the largest such action in US government history. To bail out the two corporations, the government provided a stunning $190 billion of taxpayer money.
Then, in 2012, the US Treasury changed the terms of the conservatorship and seized both enterprises to avoid a looming repeat of the Great Recession.
By now, you would expect that the financial issues of Fannie Mae and Freddie Mac would have been resolved, and we should all have learned from the experience so that we don’t end up repeating the Great Recession. Yet, in a recent congressional hearing, lawmakers admitted we are worse off today than we were at the beginning of the recession. According to White House officials, the two organizations (which are backing half the country’s mortgages) are way too undercapitalized, and lending standards have deteriorated since the 2008 crash.
In other words, the $190 billion bailout hasn’t done any good, and these two financial giants, which are “too big to fail,” are on the verge of failing.
At the Senate Banking Committee hearing about the Administration’s proposal to end the conservatorship, Senator John Kennedy said that the “whole thing is a car wreck. It’s a dumpster fire.”
“[We] could end up with a system that actually doesn’t end too-big-to-fail and doesn’t increase affordable access to credit,” added Senator Mark Warner, explaining that setting the two enterprises free would “put us right back to where we were prior to 2008.”
Fannie Mae and Freddie Mac control around $5 trillion in mortgage-backed securities, so this “dumpster fire” could set ablaze our economy once more.
At the same hearing, Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, told the committee that “as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night.”
While Fannie Mae and Freddie Mac guarantee $5 trillion in mortgage securities, they are allowed to hold a total of $6 billion as a capital buffer, according to a Congress directive. No wonder Calabria has insomnia— the two entities controlling half of the mortgage-backed securities in the country are effectively over-leveraged one thousand times. In other words, if only 0.12% of their mortgages default, it would obliterate them unless they were bailed out again.
We must maintain liquidity in the real estate market, and Fannie and Freddie are crucial in that respect. If they were no longer securing mortgages, home sales would be annihilated, causing an earthquake under the entire real estate market that would shake the whole economy. Billions, even trillions, in savings could be wiped out within months.
Perhaps we should all be suffering from insomnia…
Another housing bubble is building, adding to the “everything bubble” (stocks, bonds, etc.), which will eventually burst. Fannie Mae and Freddie Mac may soon reach the end of the road, just like over a decade ago.
After the Great Recession, many retirees suffered—let’s not let that happen again. Now is the right time to protect your wealth with safe-haven assets that have proven themselves again and again throughout history.
About Fred Abadi
In his over 14 years in the financial industry, Fred has focused on commodities and precious metals as investment assets. He has penned several articles on topics such as the commodities markets and investing in precious metals for retirement accounts. Fred has helped thousands of clients safe-guard their investments with gold and other precious metals. He has been with Gold Alliance for over two years as a leading Sr. Portfolio Manager.