The Mortgage Industry is getting back up on its feet (finally)

 

Fannie Mae and Freddie Mac, two of the United State’s largest Government-Sponsored Enterprises (GSEC) are taking steps to bail themselves out from full control of the government. These two companies guarantee housing mortgages to customers from the private sector to the government. Both companies have their own backstory on how the government gained control of them, but it all comes together starting the 2008 housing financial crisis.

Fannie Mae began business in 1938 as a government agency designed to assist Americans in finding mortgages for houses after the Great Depression. Roughly 30 years later, Fannie became privately funded and broke free from government ownership and transitioned into ownership by shareholders.

Freddie Mac was set up by Congress in 1970 to become a competitor of Fannie Mae to prevent the forming of a monopoly in the housing market. The purpose of the two competitors were to buy mortgages from banks and add a guarantee of repayment of principal and interest if the borrower were to run out of funds.

Image result for house clipart 3d

At the first signs of the Great Recession of 2008, transfers of credit risk began to inflate the U.S. Economy, causing unfair and unsecure mortgages to enter the market. In the early 1970s, both companies held less than 10% of the housing mortgages, but today, they have grown to collect over $5 trillion of housing-related guarantees and securities, accorting to The Economist. As seen below, both Fannie and Freddie took off starting in the 1990s, and dropped to zero at the start of the Great Recession.

Luckily, the government came to rescue both Fannie and Freddie in the nick of time. In exchange for $188 billion, the government took control of both companies with hopes to solve the issues of the credit crisis that America was facing at the time. The success of this transaction has been prevalent in the chart above starting in 2012 when they first started making profit after the recession.

Last week, the government has been allowing both Fannie Mae and Freddie Mac to become more independent by starting to raise their own capital once again, releasing the governmental control. Steven Mnuchin, currently serving on President Trump’s Cabinet as Secretary of the Treasury, announced the news of the alternative of passing the reforms for Fannie and Freddie to regain control to be passed through the Congressional process this past week. Whether Congress passes the reform or not, Mnuchin claims the Trump administration will make the reform go through in order to relieve governmental efforts.

The four sectors of LAM is still looking for interested club members to apply for the Junior Analyst position! This will give you many opportunities to help the club conduct research for investments in the portfolio. All levels of experience are welcome, so please do not be afraid to apply. You will go through an interview process with your perspective Director, which may take up to a week to process. If you have any questions, please do not hesitate to reach out to any of the club’s Board Members!

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