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Fannie Mae and Freddie Mac and other government-sponsored mortgage companies have become the backbone of the troubled US mortgage market as purely private sources of finance have all but dried up.
Fannie, Freddie and the Federal Home Loan Banks
, a network of bank co-operatives founded during the Great Depression, provided 90 per cent of the financing for new mortgages at the end of 2007, according to the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie.
The increasing role of the government-sponsored enterprises, or GSEs as they are known, reverses years of declining market share. Fannie and Freddie provide financing by buying mortgages and packaging them into securities. The FHLBs lend money to their member banks against mortgage collateral.
Availability of fresh mortgage funding is seen as crucial to provide support for US house prices, which have fallen sharply from their peak against a record pace of foreclosures and the resulting credit squeeze among private-label lenders.
Fannie and Freddie accounted for a record 75 per cent of new mortgage financing at 2007’s end – twice the share they held at 2006’s end when the private-label mortgage securitisation industry was booming.
Stressed mortgage lenders increasingly accessed funding from the FHLBs in the second half of 2007, pushing government-chartered mortgage finance to about 90 per cent of the market by the year’s end, Ofheo said.
The FHLBs have pumped hundreds of billions of dollars into the mortgage industry in the form of advances against mortgage collateral. They made $875bn of such loans to depository institutions in 2007, up 36 per cent on the previous year.
With record FHLB purchases of mortgages guaranteed by Fannie and Freddie, this helped offset some decline in mortgage purchases by buyers such as structured investment vehicles. Their role will increase as Fannie, Freddie and the FHLBs are under pressure to provide greater support and liquidity to the stricken US housing market, by buying more or larger US home loans.
The FHLBs were last week authorised to boost temporarily their holdings of Fannie and Freddie mortgage-backed securities by more than $100bn.
