No Federal Guarantee, No 30-Year Mortgage

The looming debt ceiling crisis and the federal government shutdown have pushed aside pretty much every other issue in Washington today, but it won’t be too long before one of the major real estate issues facing the federal government will be back on the agenda, and that’s reform of the secondary mortgage market. Its importance can’t be overstated, because if the government stops backing conventional, conforming loans—these are the all-important loans backed by Fannie Mae and Freddie Mac–it’s unlikely we’ll have 30-year fixed-rate mortgages in the United States anymore.




That’s a dramatic thing to say, but it’s what the president of Ginnie Mae is saying. Ginnie Mae is the Fannie Mae-equivalent for loans that are backed by FHA, VA, and the Rural Housing Service, and Ted Tozer is its president. He sat down with NAR just before the federal shutdown almost three weeks ago and in that conversation, he made two key observations:

First, the guarantee that the federal government provides through Fannie and Freddie is absolutely essential for lenders to offer interest-rate locks on 30-year loans. Why? Lenders know they can lock in a loan at a set rate and find global buyers of those securities, because to these investors, federally backed securities are attractive interest-rate instruments. Depending on their needs, investors will buy pools of loans at certain interest rates because they don’t have to worry about credit risk. The federal guarantee covers that for them, so MBS purchases become pure interest-rate plays.

Second, the federal guarantee is also key to 30-year, fixed-rate financing, because, again, investors are looking for pools of loans at various interest rates because that’s what they’re managing: interest-rate risk. They’re not managing credit risk. As a result, investors are willing to buy and sell securities with long-term collateral because the federal guarantee makes them marketable assets no matter what interest rates do 10, 15, or 20 years down the road.

Tozer’s views are important because he is in the global market every day and if anybody has his finger on the pulse of global investment strategies, he does. For that reason, lawmakers, no matter their policy goals, would benefit from knowing his views on the importance of the federal guarantee to mortgage securities.

In key aspects, his views align with those of NAR, which has been calling for the federal government to maintain a presence in the secondary mortgage market.

So, once Congress turns its attention to Fannie Mae and Freddie Mac reform, the Ginnie Mae president has views that can help shed light on the debate.

In the video above, NAR Vice President Joe Ventrone talks with Tozer about the workings of the global mortgage-backed securities investment market.

Robert Freedman

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

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  1. It will never happen in my opinion.

  2. The President of Ginnie Mae doesn’t want to reform Ginnie, Fannie, or Freddie? What is dramatic about that??? And he uses his position to scare the public into thinking that mortgage financing will be history without these bankrupt government sponsored entities? At this point, we should be extremely leery of anyone who ignores one side of the equation. When he says that the investors in debt instruments only want a fixed interest rate and no risk, he fails to mention that the risk remains. It is just transferred to the public who has to bail out Ginnie, Fannie, and Freddie. Investors who put their money into debt instruments, i.e. mortgages, should assume that risk themselves. When they are able to transfer the risk to the unwitting general public by having Freddie, etc guarantee the loans, there is no reason to account for risk. Therefore there is no disincentive to make bad loans. Markets become dysfunctional. The public gets stuck with the bill for the risky loans. This is exactly what caused the financial meltdown and why these companies are in bankruptcy. Eliminate Freddie, Fannie, and Ginnie. Eliminate “too big to fail.” Markets will demand to be paid for risk. Markets will be much more efficient. Those investors who do not properly account for risk will loose money as they should. But the public will not be forced to pay for their mistakes. Prior to the great meltdown, Fannie, etc failed to disclose the serious financial crisis they were in. To the contrary, they repeatedly told Congress that everything was A-OK. There is no reason to expect that anything has changed.
    There is another reason to get rid of Fannie, etc. The money they siphon out of the mortgage markets is often used for political bullying, favors, and partisanship. Get rid of them and you get rid of the slush fund that buys political favors.

  3. Very interesting article.. It is unfortunate that a 30 year mortgage is not an option anymore.

  4. Arthur

    The odd thing about Fannie and Freddie, although they went into receivership and are overseen by the Federal Government due to the housing crisis brought on by unscrupulous lending practices, is that they both have returned such massive profits to pay the Federal coffers. Why would we want to get rid of a couple of entities that can do that? Instead, just continue the application of the very principles under which Fannie and Freddie are governed right now, and ease them back into a profit dividended player in the stock arena. The true spread of free and privat market will more easily be attainable by global business, not by breaking up the profit maker these two giants have become. We already broke up the phone company goliath before that has taken us from a twenty dollar a month habit of talking with black devices to four hundred dollar a month habits! That didn’t work either. Just put a couple of failsafes on the two, and let them run their courses.