The Spectacle Blog

Two on the GSEs

By on 8.10.11 | 6:31PM

Two major news items related to the now-downgraded, government-owned Fannie Mae and Freddie Mac:

1. Fannie has purchased the servicing rights to 400,000 home loans from the struggling Bank of American for $500 million. The loans have an unpaid principal balance of $73 billion, leading many to conclude that Fannie's actions, because they are directed by the government, amount to a backdoor bailout of Bank of America.

There have been any number of accusations that Fannie and Freddie have propped up investment banks by purchasing faulty loans from them, but never any hard and solid facts. That's true for this one as well. Although this is an unusual transaction, it will be impossible to tell how much the purchase benefited Bank of America (if at all) until the amount that Fannie makes selling the rights to collect payments on the loans to another servicer is known (Fannie doesn't service mortgages). 

Either way, though, it's worth noting that this transaction represents a conflict of interest: Bank of America, under the Dodd-Frank Act, is a "systemically important financial institution," meaning that the FDIC would be on the hook for its losses if it failed (which shouldn't be unthinkable at this point). Yet this sale was made to another entity on the government's books, namely Fannie. 

2. The Federal Housing Finance Agency is asking for suggestions for what to do with the roughly 250,000 foreclosed-on houses it owns through Fannie, Freddie, and the Federal Housing Agency. You can go here and offer a suggestion. The feds are currently considered a number of options, including offering the houses as rentals. 

Clearly this is an undesirable situation. Asking the federal government to act as a holding company for vast numbers of rentals across the country isn't desirable by anyone's reasoning. It should be taken as a reminder of the dangers of letting any company receive privatized profits and government backing. 

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