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Among the many messages voters sent to Washington yesterday was: Get the government out of financing homes now and let the private sector do it.

Election Spells Doom for Fannie and Freddie

Among the many messages voters sent to Washington yesterday was: Get the government out of financing homes now and let the private sector do it.

The result could spell higher financing costs for homeowners but lower costs and reduced risk for taxpayers.

The midterm election results are particularly important for housing finance, since 2011 will see the significant reform in the government’s role, beginning with the Administration’s recommendations for the future of Fannie Mae and Freddie Mac, due early next year. While the Administration will propose a new structure, the new Congress will eventually decide what will happen.

The Republican landslide that swept through the House ensures that the outcome will be a radical policy change that will rely much more on the private sector, especially lenders and investors, and less upon Federal support. Fannie and Freddie will certainly cease to exist in their current forms and government exposure to the risks involved in financing mortgages will be reduced.

The precise form of a Republican response to the Administration’s proposal for a new system of housing finance is expected during the first quarter. Yesterday’s election made that response at least as important as the Administration’s.

Coupled with the change of party control in the House, the net result is a pendulum swing away from the philosophy that calls for the Federal government to shoulder a lion’s share of the risk by guaranteeing securitized mortgages, an approach that dates back to the creation of Fannie Mae in 1936.

The election cost some key allies of Fannie Mae and Freddie Mac their seats. Most notably Rep. Paul Kanjorski (D-Penn), who chaired the subcommittee which has jurisdiction over Fannie and Freddie, went down in defeat despite $1.2 million in support from the National Association of Realtors, NAR’s biggest loss of the election. Other losers that NAR backed heavily were Bob Foster (D-Fla) and John Adler (D-NJ).

Rep. Barney Frank, chairman of the House Financial Services Committee, who was once an outspoken backer of Fannie and Freddie but has recently changed his views, easily beat back a strong challenge to his seat and will return to Congress for his 15th term, but not to his chairmanship.

The change of party brings with it a change of committee leadership. Rep. Spencer Bachus (R-AL), currently the Ranking member on the committee, is expected to take over the chairmanship, a post he held before the Democrats took the House in 2008. Bachus recently told Fox News one of is two top priorites is “shutting down, once and for all, Fannie Mae and Freddie Mac.”

However, the chairmanship won’t be decided until the GOP Caucus meets later this year and there may be a chance that Rep. Ed Royce (R-Cal) will become Chairman.

In a news release 15 months ago, Royce outlined his thoughts on Fannie and Freddie.

“With the understanding that no two institutions were more central in enabling a housing boom to become a housing bubble (which inevitably led to the housing bust) than Fannie and Freddie, I believe reforming the GSE model is critical.

“Going forward, Fannie and Freddie should be broken up into smaller companies and any direct or indirect government support should be eliminated — thus eliminating the ability for political manipulation.

“At a minimum, the retained portfolios should be unwound and any ambiguity in the way of government support should be addressed.

“Without including these reforms, we run the risk of having to deal with an even greater collapse down the road.”


  1. Fannie Mae and Freddie Mac are prime examples of just how disastrous the intersection of government incompetence, liberal social engineering and banking greed can truly be. Killing Fannie Mae and Freddie Mac is way overdue.

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