Feb 11 2011

Fannie Mae and Freddie Mac: Implications for Credit Unions

Report  
Number  
228

This report breaks down the benefits, purported and real, that Fannie Mae and Freddie Mac bring to the mortgage market and the credit union system.

David Reiss
Professor
Brooklyn Law School
Report Number 228

Executive Summary

Whether as a citizen, a consumer, or a credit union leader, your opinion of Fannie Mae and Freddie Mac probably depends on how much they’ve helped you lately. As a citizen, do you resent the implicit guarantee that has become all too explicit as the two companies have entered conservatorship, or do you sleep better knowing that the government is the final backstop in this mortgage mess? As a consumer, are you glad you got a better price on your mortgage because of Freddie Mac’s borrowing power, or would you prefer more mortgage options with a broader range of choices? As a credit union leader, are you eager to keep the GSEs around because they make selling your conforming loans easy, or would you prefer a system in which you had more options for keeping or selling your loans?

What is the research about?

Fannie Mae and Freddie Mac: Implications for Credit Unions engages the work of legal expert David Reiss to break down the benefits, purported and real, that Fannie Mae and Freddie Mac bring to the mortgage market and the credit union system. This research is critically important for credit unions, because:

  • The reform discussion has already begun. The Dodd- Frank reform act attacked the gamut of systemic financial shortcomings, while deferring a debate about the GSEs until 2011. Now is the time for credit unions as small mortgage lenders to make their wish lists for a redesigned secondary mortgage market.
  • The cost of the bailout is staggering. Whether as managers or simply as citizens, credit union leaders should care about the longterm effects of the GSEs’ conservatorship.
  • Credit unions lend based on the structure of the secondary mortgage market. Whatever happens to Fannie Mae and Freddie Mac will weigh heavily on mortgage lending everywhere.

What are the credit union implications?

Reiss concludes that Fannie and Freddie should be privatized, and the benefits that the two companies produce in the residential mortgage market should be maintained through alternative means, including financial regulation, consumer protection legislation, and increased subsidies for affordable housing. Credit unions benefit from the access to the secondary market that Fannie and Freddie provide, but they could be better served by a secondary market with more competition so long as they maintain their access on par with that of larger financial institutions.