Fannie Mae, Freddie Mac hold critical role in home mortgage system

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[July 15, 2008]

Fannie Mae, Freddie Mac hold critical role in home mortgage system

(The Pittsburgh Tribune-Review Via Acquire Media NewsEdge) Jul. 15--Consumers might not feel connected to Fannie Mae or Freddie Mac, but there's a good chance the agencies helped them buy a home.

The two enterprises provide the main grease behind the nation's home mortgage industry. Together, the wholesale lenders own or back some $5 trillion in home mortgages, or roughly half those in the United States.

"Fannie Mae's role is critical in the housing market," said Howard Slaughter Jr., CEO of Landmarks Community Capital Corp., South Side, and head of Fannie Mae's Pittsburgh regional office from 1999 to 2007.

"In Pittsburgh alone, we funded well over $3 billion in the six-county region during the time I ran the office," he said.

In Pennsylvania, Freddie Mac bought up $116.3 billion in mortgage loans to about 1.01 million households from 1996 through 2006, a spokesman said. Comparable figures for Pittsburgh were not available.

Slaughter and other experts on Monday agreed the federal government's plan during the weekend to shore up Fannie and Freddie is necessary.

"Nobody's ever going to let Fannie or Freddie go. I think the government's plan is all positive," said John Heagy, vice president of residential mortgages at Dollar Bank, which sells a large portion of its loans to one or the other.

Fannie Mae and Freddie Mac "provide liquidity to the mortgage market," Heagy said. By selling the mortgages, Dollar and other lenders don't have to wait 30 years for consumers to pay off a mortgage loan. The lender gets that money from Fannie or Freddie up front -- enabling the lender to turn around and write more mortgages.

"If they continued to struggle ... over time you might see increased costs to the borrower because we would not have an entity to sell our loans to," said Heagy, noting that would force Dollar to raise mortgage interest rates.

The Fannie Mae and Freddie Mac rescue plan took shape after stock prices fell when investors in recent weeks started selling shares heavily, concerned the two housing lenders could be mired in the foreclosure mess that crushed the subprime mortgage market. Neither entity deals in subprime loans, however.

"If they suddenly melted down, it would throw a huge monkey wrench into the already wobbly mortgage market," said Gerald Driscoll, a senior fellow at the Cato Institute and former vice president of the Dallas Federal Reserve Bank.

Investors drove down Fannie Mae and Freddie Mac's stock price because they feared the corporations' upcoming earnings reports for the spring quarter "might contain more losses than were expected. But that's speculation," said Driscoll.

Fannie's shares have dropped from about $25 a month ago to nearly $10 now. Freddie's shares have fallen from about $24 to about $7 in the past month. Yesterday, Fannie Mae fell 52 cents, or 5.1 percent, to $9.73, while Freddie Mac fell 64 cents, or 8.3 percent, to $7.11.

"The rescue should allay the fears of those investing or borrowing," said Slaughter.

Fannie Mae and Freddie Mac are similar in nature. Neither is technically part of the federal government. Both are wholesale lenders that fund retail lenders' -- banks and savings institutions -- home mortgages.

The older and larger of the two is Fannie Mae, which is short for "Federal National Mortgage Association." It was created in 1938 as a government agency that acquired government-insured mortgages in order to expand home ownership. It became privately owned in 1968, and its shares trade on the New York Stock Exchange.

Freddie Mac is short for "Federal Home Loan Mortgage Corp.," established in 1970. Initially, the corporation bought and securitized only mortgages backed by the Veterans Administration and the Federal Housing Administration but has since expanded to nongovernment-backed mortgages.

"All of our 17 bank and savings and loan partners use either Freddie or Fannie," said Steve Shivak, executive director of the Pittsburgh Community Reinvestment Group, Hill District. "If Fannie or Freddie were in difficult straits, our lenders would have a tougher time putting money on the street."

To see more of The Pittsburgh Tribune-Review or to subscribe to the newspaper, go to http://www.pittsburghlive.com/x/pittsburghtrib/.

Copyright (c) 2008, The Pittsburgh Tribune-Review
Distributed by McClatchy-Tribune Information Services.
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