Fannie + Freddie = Frannie ?

Hmmmm . .  take two poorly run, debt laden GSEs . . . Merge them . . . What do you get ?

One giant, poorly run, debt laden, GSE.

Its an idea so powerfully bad, ill conceived, and poorly thought out, it has precisely zero chance of occurring. If you think an idea this foolish, pointless, and banking fee laden could only have come from anals (sp) of Wall Street, then congratulations! You’ve figured out how some of the best and the brightest operate on the Street of Dreams.

A brief history lesson of these two entities quickly reveals what a silly idea this is:

In the depths of the Great Depression, the housing sector was an utter disaster. Its been estimated that over the course of the early 1930’s, nearly one in 5 homes were in danger of default and foreclosure. The Home Owner’s Loan Act of 1933 created The Home Owner’s Loan Corporation (HOLC) in order to “relieve the mortgage strain and then liquidate.” From June 1933 to June 1935, the HOLC received 1,886,491 applications for $6.2 billion of home mortgage refinancing, an average of $3272 per application. HOLC purchased old mortgages in exchange for government bonds, and then reissued the mortgages at a lower interest rate.

Incidentally, in those days, mortgages were not 30 year fixed principal and interest mortgages we know today. Instead, the typical mortgage was an interest only, 3 – 5 year loans, with a balloon payment at the end. They did not amortize (pay down principal over time). Typically, home owners renewed upon maturity.  When credit froze up, the home owner lost the ability to roll the old loan into a new mortgage — hence, the danger of losing their house.

Fannie Mae (FNM) was formed in 1938 to provide additional liquidity, creating a secondary mortgage market. Creating an entity to provide liquidity to the secondary market for mortgages would free banks to make additional loans.

In 1968, with the US budget under severe pressure form the costs of the Viet Nam war, Lyndon Johnson moved Fannie Mae "off balance sheet" of the federal budget. But once this government service became a private entity, it created a functional monopoly. To create some competition, in 1970 the Federal Home Loan Mortgage Corporation (FHLMC) was formed. That is the entity we now know  as Freddie Mac (FRE). (History lesson over)

What would the creation of "Frannie" accomplish?

Well, other than generating some banking fees, not a whole lot. It would remove competition from the the secondary mortgage market. It would put two management teams with a long history of corruption together. Lastly, it would create an even bigger lobbying and political influencing entity.

No thanks . . .


And They Could Call It Frannie
NYT, September 1, 2008

The Federal Response to Home Mortgage Distress: Lessons from the Great Depression
David C. Wheelock
The Federal Reserve Bank of St Louis Review.  May/Jun 2008

From the New Deal, a Way Out of a Mess
Alan S. Blinder
NYT, February 24, 2008

Long Term Policy Evolved By HOLC
NYT, January 2 1936

History and Policies of the Home Owners’ Loan Corporation   
C. Lowell Harriss
New York, NY. National Bureau of Economic Research. 1951

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What's been said:

Discussions found on the web:
  1. Barry commented on Sep 2

    If we merge Phony and Fraudy, Do we end up with Frony or Phraudy?

  2. Ken commented on Sep 2

    Essentially, it would replace two small piles of shit with one giant turd pile.

  3. VennData commented on Sep 2

    …well it would fit the American model, where we build institutions that are too big too – wait for it – frail.

  4. Unscrpited Thoughts commented on Sep 2

    Wall Street? Naahhhh….that idea is so incredibly stupid it has to be from someone at the Fed. After all, the brainiacs on WS helped create CDO’s, RMBS’s, CDO2, Alt-A, sub-prime…uhhhhh…never mind.

  5. Matthew commented on Sep 2

    the equation is:
    Fannie + Freddie = US – DIED

  6. constantnormal commented on Sep 2

    This would be ridiculous, except that we have the lessons of 9-11 to guide us in what to expect.

    This is essentially how the inept monster Homeland Defense came to be, by merging all the other ineffectual agencies, injecting a boatload of cash (looking for better euphemisms, as “boatload” seems too limited in its descriptive nature), and what do we have? Something unbelievably large, with the sum of all the previous problems.

  7. MM commented on Sep 2

    I love the knee-jerk assumption that all overhead costs can scale.

    That conservative $1.2 billion savings isn’t demonstrated–and given the huge amount of paperwork that is involved in the whole mortgage business it would be nice to know exactly how 2/3 of the people can handle the same volume of work.

  8. Patrick McMurray commented on Sep 2

    No…It’s not Frannie, it’s Feddie, like in Feddie Reserve….

  9. Shnaps commented on Sep 2

    Barry – it’s principal, not principle.

    Otherwise, excellent post.


    BR: Damned Voice Recognition!


  10. prahapartizan commented on Sep 2

    “…could only have come from anals (sp) of Wall Street…”

    If by “anals”, you meant “chronicles” or “records of activity,” then you should have chosen “annals.”

    Personally, I prefer a play on the sound of offered by the word combination – “…the nulls (or “nils” if you choose) of Wall Street…” It captures the positive contributions made by most of the lunatics active in the area so much better.

  11. flory commented on Sep 2

    What would the creation of “Frannie” accomplish?

    You have to start from the realization that the whole concept of an ‘implicit’ government guarantee is so much bullshit; these entities either have a government guarantee, or they don’t.

    And if they do then I, as a taxpayer, am going to be on the hook for the corruption of the management team. In which case, I’d just as soon have a say, as a registered voter, in who that management team is.

    And once you’ve nationalized the whole corrupt mess, it really doesn’t make sense to have two competing, nationalized entities.

    As your post points out, the only reason they were privatized was to finesse the federal budget during the Vietnam War. There’s no economic rationale for them *not* to be on the federal books.

  12. Pat G. commented on Sep 2

    What if they nationlize both and put them under the management of someone who is well respected and pay them a fee. Profits would go to shoring up the balance sheet.

  13. Matt commented on Sep 2

    Fannie + Freddie = FUBAR


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