Nationalized Lending May be Permanent

Unfinished homesNearly 9 out of 10 home mortgages are now being sold to Fannie Mae and Freddie Mac, the government sponsored enterprises taken over by the federal government at the peak of the financial crisis and backed by taxpayer money.

The government supported program has strongly nationalized mortgage lending and put the housing market on life-support. As foreclosures climb to new record levels on almost a monthly basis, despite increasing home sales in many areas of the country housing markets are troubled. Some 85% of mortgages made in the first half of the year were sold to Fannie and Freddie, according to government figures.

Three banks, including the biggest mortgage providers in the industry, Wells Fargo and Bank of America are selling more than half of all home mortgages. Fannie and Freddie are packaging the mortgages into securities and selling them on Wall Street, many as unregulated derivatives similar to those that brought down the financial system triggering the credit crunch more than a year ago.

Donating $354-billion to Congressional campaigns during the real estate boom by industry lobbyists is paying off big dividends for bankers. Inside Mortgage Finance reports the big three originated 52% of all mortgages in the first half of the year. Big bankers have historically lobbied and received what they want from Washington, D.C.

President Barack Obama made it clear from the outset that nationalizing mortgage lending is not an intention of his administration. But that the governments take over of Fannie Mae and Freddie Mac are temporary measures to strengthen the mortgage lending marketplace.

As a result of failing mortgages and weaker demand for loans both government insurers of home mortgages saw their stock prices tumble in the wake of the financial crisis. Today both are beset by a stock pile of bad loans and are in dire economic shape. Without the aid of government help both would be insolvent.

The emergency take over has changed the mortgage lending environment as smaller local banks fail. Mortgage under-writing guidelines have been tightened to enforce more restrictive lending standards.

Just how the government intends to unwind or cut the purse strings from Fannie and Freddie is unclear. The three largest banks, B of A, Wells Fargo and JP-Morgan Chase are reaping the rewards, posting $14-billion in total revenues from making mortgages in the first half of the year. The big three made $4.1-billion in combined revenue the first half of 2008.

A program to make both companies private entities is far from being transparent to consumers and investors, who are concerned about the bail-out becoming permanent. The nationalization of mortgage banking seems to be the only course of action the government can take, barring action by an outside firm or group of companies to take over the government sponsored entities.

However, at least one exit strategy is apparent. The Fed’s $1.25-trillion program to purchase Freddie and Fannie securities is nearly two-thirds exhausted and scheduled to cease at the end of 2009. Additional government monies from the Fed and Treasury could be added to extend the re-purchase program.