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Why Freddie Mac is Still Needed
While acknowledging Freddie Mac's role in creating today's vibrant and robust mortgage market, some argue that Freddie Mac is no longer needed to help maintain it. Underlying this argument is the belief that without Freddie Mac, there would be less government involvement in the mortgage market, and it would function just as well or even better as a result. In fact, without the GSEs there could be as much – if not more – direct government involvement in the mortgage market, and the mortgage finance system could become less consumer-friendly and financially robust. If the GSEs were to go away, government involvement in the mortgage finance system would not disappear but simply shift into different forms. Nor would the risks associated with mortgage investing be reduced. This is because many of the mortgages Freddie Mac buys today would go into the investment portfolios of banks and other depository institutions. While these are private institutions, they receive significant government support in the form of federal deposit insurance and access to low-cost funds through the Federal Reserve System and the Federal Home Loan Bank System. Second, without Freddie Mac's support of affordable housing, there likely would be increased demand for mortgages insured by FHA or guaranteed by the VA. Congress chartered Freddie Mac to fulfill a public mission of providing liquidity, stability and affordability in the residential mortgage market. Other investors are free to enter or leave the mortgage market at any time but Freddie Mac makes mortgage money available throughout the country at all times, regardless of economic or market conditions. A mortgage finance system without Freddie Mac could be less able to ensure the continuous availability of funds for American homeowners.
Some also argue that Freddie Mac's housing mission could now take care of itself in this country and should no longer be a government concern. However, Freddie Mac believes that the still-wide gap in the homeownership rate between white families, and minority and new immigrant families, is unacceptable. Moreover, the emerging markets are where the growth is for the industry. In the years ahead, more than two-thirds of all household growth will come from minority families. The nation will need roughly $1 trillion per year in mortgage funding over the coming decade to house the next generation of homeowners. It is more important than ever that policymakers reinforce rather than weaken the nation's commitment to housing so that Freddie Mac can continue to meet the needs of the nation's growing populations. If Freddie Mac is treated like an ordinary financial institution, and is so perceived by the markets, we will soon lose the ability to fulfill the goals and special responsibilities of a GSE. These are responsibilities that no purely private institution has. In addition, without Freddie Mac, consumers could pay more for mortgage credit and have fewer choices available. Because of Freddie Mac and Fannie Mae, mortgage rates in the conventional conforming market are at least ¼ of a percentage point below jumbo mortgage rates. On a $200,000, 6%, 30-year mortgage, for example, this reduces the borrower's direct interest costs by $12,000 over the 30-year lifetime of the mortgage. Lower rates produced by the activities of Freddie Mac and Fannie Mae have been estimated to save America's homeowners between $8.4 billion and $23.5 billion annually in interest costs.1
And borrowers in the portion of the mortgage market Freddie Mac serves have more choices than borrowers in other markets. In particular, 30-year, fixed-rate, low-down-payment prepayable mortgages are much easier to obtain in the portion of the market Freddie Mac serves than in other markets. Freddie Mac fulfills its mission by operating as a shareholder-owned, market-driven business. We receive no taxpayer funds and are regulated to ensure our continued financial safety and soundness. By operating this way, we fulfill our mission while efficiently using shareholder capital, and we substantially reduce the need for direct government involvement through taxpayer-funded housing programs. Freddie Mac is a prime example of how government can use market mechanisms to achieve public purposes. 1 J. Pearce and J. Miller, Freddie Mac and Fannie Mae: Their Funding Advantage and Benefits to Consumers, January 2001.
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