Remember when the housing bubble started to burst in late 2007?
By September 2008, both Fannie Mae and Freddie Mac had experienced heavy losses and were placed into conservatorship. The government then advanced them a whopping $190 billion of taxpayer money to keep them afloat.
At the time, this action was described as “one of the most sweeping government interventions in private financial markets in decades.”
Turns out, the drama wasn’t over. In fact, it was just getting started...
After changing the terms of the conservatorship, both organizations were seized by the U.S. Treasury in 2012 to avoid a financial catastrophe like the one that had occurred during the Great Recession a few years earlier.
Given the benefit of experience, you would think Fannie Mae and Freddie Mac’s financial problems would have been cleaned up and resolved. But in a recent hearing for the Senate Banking Committee, Trump Administration officials warned, “The U.S. housing finance system is…
“Worse off today than it was on the cusp of the 2008 financial crisis.”
If the situation is worse now than it was 11 years ago, that means the $190 billion bailout didn’t do much good.
In fact, officials from the Administration are also warning that lending standards have deteriorated since 2008 and the two entities lack sufficient capital. (These loose lending standards help to explain the rise of unconventional loans.)
In light of these facts, the Committee meeting examined the Administration’s call to end conservatorship of Fannie and Freddie. In the hearing, Senator John Kennedy lamented that the “whole thing is a car wreck. It’s a dumpster fire.”
Senator Mark Warner added, “We could end up with a system that actually doesn’t end too-big-to-fail and doesn’t increase affordable access to credit” and is “going to put us right back to where we were prior to 2008.”
Together, Freddie Mac and Fannie Mae control about $5 trillion in mortgage-backed securities. That means the impact from any “car wreck”, like Senator Kennedy alluded to, could potentially be catastrophic to the economy.
Fannie and Freddie Are Severely Over-Leveraged
On its own, this information from the Committee hearing is sobering enough, but the same meeting also shed light on another disturbing fact:
“I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,” Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, told the committee.
Thanks to a directive from Congress, both Fannie Mae and Freddie Mac are allowed to keep a total of $6 billion ($3 billion each) as a capital buffer. But they own or guarantee almost $5 trillion in mortgage securities.
That’s why Calabria is losing sleep at night. Two entities that control half of the mortgage-backed securities in the U.S. are effectively one thousand times over-leveraged.
To put that in perspective, if just 0.12% of Fannie and Freddie’s mortgages go bad (about one-tenth of 1%), it would wipe them out completely. They’d have no capital left. And without a government bailout, they might cease to exist altogether.
Fannie and Freddie are critical to maintaining liquidity in the real estate market. Without these two entities repackaging and guaranteeing mortgages, the sale of homes would be decimated, causing a massive ripple effect across the entire real estate market.
It would not be an understatement to say that billions (if not trillions) in savings could be wiped out within months of Fannie and Freddie going belly up.
Maybe that should be keeping all of us up at night, too.
Don’t Let a Housing “Car Wreck” Ruin Your Retirement
These are interesting times indeed. The impending housing bubble, a rise in risky loans, and both Freddie Mac and Fannie Mae may be heading towards the end of the road. And all of them seem to be following a similar script to 2008.
Don’t let your retirement suffer, like many did after the Great Recession. Now is a good time to consider hedging your bets.
Diversify into assets known to be a source of protection during times of economic disruption, such as gold and silver. There may never be a better time to protect your savings than right now.
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