Why ‘PATH’ Approach to Fannie, Freddie Phase-out is Troubling

Lawmakers have been talking about reforming the secondary mortgage market since the housing bust, but the effort has remained largely in the planning stage. Now it’s moving forward.




In the House last week, the Financial Services Committee passed a bill, called the PATH Act, which would phase out the two secondary mortgage market companies, Fannie Mae and Freddie Mac. The bill would also make major changes to the way FHA conducts its business. “PATH” stands for “Protecting America’s Taxpayers and Homeowners.”

In the Senate, comprehensive legislation has been introduced that would also phase out Fannie and Freddie but, unlike in the House, the federal government would remain as an insurer of last resort, much like the FDIC is the insurer of last resort for troubled banks. In the House, there is no plan to keep the federal government involved in mortgage financing except through a much-modified FHA (not counting specialized markets like those served by the Rural Housing Service and the Department of Veterans Affairs).

NAR has long called for replacing Fannie and Freddie while ensuring continued mortgage market liquidity through the maintenance of an explicit federal presence in the market. On that basis, the Senate approach, called the Housing Finance Reform and Taxpayer Protection Act, is the better starting point of the two. But a lot more discussion is needed, both in the House and in the Senate. In both approaches, questions remain about how households would fare should ether become law in their current form.

It’s unclear how far Congress will get this year in taking the next step to pass either of these bills or to consider other bills that need to be factored in, including those that just focus on FHA reforms. But now that the process is getting started in earnest, anyone with an interest in the availability of mortgage financing will want to pay attention to what’s happening. Because even if the process takes a couple of years, there will be key points in which input from the real estate industry is needed to move the debate in the direction that best protects households who want to buy.

In the 6-minute video above, NAR analysts talk about the concerns NAR has with the approach that was passed last week by the House Financial Services Committee. They also talk about what’s moving through the Senate and why engagement by NAR members will be so important in the months ahead.

More from NAR on secondary mortgage market reform, and more on FHA reform.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. Why does NAR believe that Fannie and FREDDIE need to be eliminated? What would replace them to assist working and middle class homebuyer? Not good.

  2. Current mortgage financing rules must be reviewed and fixed as soon as possible! In South East Florida Real Estate market we’ve been having a very big overtake towards cash home purchases, especially in condo sales. As Florida Real Estate professional I’d say some 98% of all condo sales in the areas of Miami and Fort Lauderdale are all cash sales. Most of the sellers are afraid to accept mortgage contingent offers due to disbelief that the prospective buyers would secure a mortgage. Lenders are reluctant to finance most of the condo sales in Florida due to national regulators. In fact, most of the lenders are in search for foreign borrowers because it is way easy for foreigners to be qualified for financing than for an Americans. Also, national regulations put a very stiff margin for condominiums to be qualified for FHA or even conventional loans. We all know the reason: the last financial crisis. But we are out of there and the rules should be adjusted. The unavailability for local buyers to be qualified for a mortgage makes the market “under-inflated” with a price bubble growing up. We already feel condo inventory dropping down fast which creates frustrated buyers who can’t find the home they can afford and making sellers to price their properties with a huge marge from the recent sales. If this situation continues at the same pace, very soon we’re going to face real estate sales dropping down a lot, which again is going to affect all US economy!

    HolaHomes-Miami Real Estate Blog: Current mortgage financing rules must be reviewed and fixed as soon as possible!

  3. Dale Todd

    Sorry, but the house bill sounds exactly like what is needed. The government guarantee is precisely what allowed the megabanks to be the bad actors in the financial crisis, and you can bet it will happen again if that is not changed. The Senate bill allows for a 10% loss for the banks before the government steps in, but clearly that is not enough to keep the banks in line…at least 20% skin in the game. Will it lead to higher interest rates? Unlikely, as the banks will still compete to get your business.

  4. Bill


    That’s incorrect.

    Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.

    Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

    70% of the securitization offers were done by Countrywide, and private sector banks, and the primary responsibility fell squarely on the CDOs. I suggest that you watch the CNBC video “A House of Cards,” which provides an insightful, investigative view of the events that led to the crisis. There have also been 17 lawsuits against private sector banks for mislabeling their loans as AAA and selling them to Fannie and Freddie.

    The Restore Fannie Mae site provides many details and links to facts in their blog section, and it’s highly recommended reading!

  5. So Fannie Mae and Freddie Mac have been extremely profitable through the majority of their existence. A few off years (economic collapse) and boom…. government conservatorship. Last I heard they are profitable again. As a tax payer, wouldn’t I want the government to hold on to something actually providing revenue that’s funded by “other people’s money (China, Mexico, Japan, etc.) The GSE’s play an important role in the global economy, but you don’t hear much talk about that impact.

  6. Am I the only one who remembers “too big to fail”? If the past is any indication of future government action and intervention it does not really matter what laws are enacted by congress “to protect America’s taxpayers and Homeowners”. These laws will do nothing to keep the government from coming to the rescue of the banking industry at the expense of the taxpayer. And do not be fooled by the rhetoric… without the government’s assurance in the secondary market interest rates will skyrocket. That is simply a risk/reward market fact. The naivety to believe that competition to make loans will keep the interest rate down is ridiculous.