I will do anything to avoid going to the post office – and will drive miles out of my way to go to UPS or FedEx instead.
The reasons are obvious – the service at the post office is often horrible; they lack necessary supplies; the buildings are dreary; and the lines are long.
The U.S. Postal Service was once highly respected and profitable, but since the 1970s it has steadily gone downhill to turn into the morass it is today.
In sharp contrast, UPS and FedEx are very efficiently run, as they are competing tooth and nail for business and are subject to the discipline of having to make money.
Note: I have nothing against postal workers; I am merely illuminating how the lack of profit incentives and the monopoly power of government can destroy any operation.
I mention the post office because Fannie Mae is not the post office…yet.
But, give it time.
What Are Fannie Mae And Freddie Mac
Fannie Mae and Freddie Mac are “Government-Sponsored Entities” (GSEs) that were established to provide liquidity for the mortgage market (to make sure there were entities willing to offer mortgages when banks and savings and loans would not).
Fannie and Freddie don’t originate loans, but instead buy them from originators or “aggregators” (investors that buy up loans from originators like JVM).
Fannie Mae then turns those mortgages into mortgage-backed securities (MBS) and sells them to investors.
I should add that Fannie does not just buy conforming loans (loans that conform to its underwriting standards), but it also buys FHA and VA loans as well.
The reason mortgage interest rates are so much lower because of Fannie and Freddie is because the government guarantees every loan underwritten to their standards.
Fannie’s rates are particularly low for first-time homebuyers with small down payments (under 10%). Without Fannie and Freddie, many of those buyers would have trouble getting financing at all.
During COVID, Fannie and Freddie saved the day too, as banks and aggregators were not issuing or buying any loans for a while – but Fannie and Freddie were buying them en masse.
But for Fannie and Freddie, the mortgage market would have shut down and many mortgage banks would have gone out of business.
Fannie and Freddie were almost “government” prior to 2008, but they effectively became 100% government after 2008 when they went into conservatorship (the government took them over) because of their enormous losses (mostly because they bought so many “Alt-A” and subprime loans that a basset hound would not have touched).
If Fannie and Freddie were privatized or yanked out of conservatorship, they could not compete – per Chris Whalen in this recent Julia La Roche podcast.
This is because they are effectively an inefficient monopoly (without real competition) that dominates about 70% of the mortgage market – backing loans that regular lenders would not make but for their backing.
Sidebar: I have an acquaintance who once hired a former Fannie Mae executive at a mortgage bank, and he was largely useless because he had never learned to compete in a competitive marketplace.
Fannie charges lenders 50 basis points (1/2% of the loan amount) for the government guarantee/Fannie backing.
If Fannie was privatized, according to Mr. Whalen, it would instantly lose its AA+ (stellar) bond rating, upending much of the mortgage market (rates would shoot up).
In addition, Fannie would have to start PAYING the government for its guarantee; they could not afford it because they are not nearly efficient enough to compete with the major banks (like Chase and U.S. Bank) that also issue mortgage-backed securities and that also could garner the same government guarantee if the playing field was leveled.
Why Am I Anti-Fannie And Freddie?
Because they are effectively a government-run monopoly, they are becoming less and less efficient, like the post office.
Sidebar: My neighbor is the CFO of a consumer debt company that gives instant approvals for consumer loans based on a very complex algorithm. They have a very low default rate – even in a softening economy – because the algorithm is so effective.
I remain convinced that similar algorithms would work for the mortgage world, but for Fannie’s and Freddie’s monopoly and the government regulators that control them.
In the late 1990s, lenders were surfacing everywhere to compete with Fannie and Freddie, much like how UPS and FedEx surfaced to compete with the post office.
Those alternative lenders, however, went too far in the 2000s because of government encouragement and Fannie’s willingness to buy their loans.
The government’s push for lax lending standards (to make housing “affordable”) and Fannie’s subprime loan purchases were major causes of the mortgage meltdown – that resulted in the takeover of Fannie and Freddie and the imposition of much more onerous mortgage regulations.
If we could somehow return to a 1990s environment, where the government did not dominate, back, and/or over-regulate the entire mortgage market, interest rates would probably end up being lower and obtaining a mortgage would be far easier.
In addition, default rates would likely be much lower too. And even better, we lenders could sell more than just 30-year fixed Fannie Mae mortgages – just like we did in the old days when smart lenders with the most loan options garnered the most business.
We would no longer be commodity salespeople.
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