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Legal Insider - How Will the Fannie Mae/Freddie Mac Bailout Effect You?


Atty. Rich Kallman


As the billions of dollars that taxpayers paid to bail out private companies such as AIG, General Motors, Chrysler, Bank of America and Citigroup after the 2008 sub-prime mortgage/stock market crisis are repaid, there is another, even larger public bailout that doesn't get nearly the publicity it merits.  It is the bailout of Fannie Mae and Freddie Mac that is ongoing and will only get more expensive.  To date, the two private companies have cost American taxpayers over $150 billion and the estimate is that the figure will double to $300 billion. OUCH!

The United States Treasury Department has been studying reforms to Fannie Mae and Freddie Mac since the height of the sub-prime mortgage crisis. Read NPR's series on the subject.  The Treasury's proposals were released just a few weeks ago and Congress is expected to act on them in the next few months.  The most aggressive reform would phase out Fannie Mae and Freddie Mac entirely over five years.  Without these mortgage giants to buy mortgage loans, the housing industry would have to rely exclusively on private lenders to finance the $12 trillion mortgage market. Mortgage rates, particularly for fixed rate loans, would certainly increase without the stabilizing effect of Fannie Mae and Freddie Mac, which currently own or guarantee more than 50% of all mortgages in the United States.  Lesser reforms have also been proposed that will increase the cost of borrowing.  Additional borrower fees or taxpayer-financed insurance are distinct possibilities to protect against a future financial crisis like the sub-prime meltdown that occurred in 2008.  These extra fees are expected to result in interest rate increases for home mortgage loans.

Most Washington insiders believe politicians don't have the stomach to take on true reform of Fannie Mae and Freddie Mac, since they were among the largest monetary contributors to federal lawmakers and one of the best organized lobbying forces in Washington.  As the housing market slowly recovers, the firms' strengths will be restored as will their political clout.

The key for potential homeowners is whether Congress enacts the more modest reforms or legislates the entire phase-out of Fannie Mae and Freddie Mac, housing analysts agree that the period of historic low 30-year fixed rate mortgages is drawing to a rapid close.  These pending reforms, along with a real estate market that has reached bottom, signify that this spring, more than ever, is the time for first-time homebuyers to jump into the market or for existing homeowners to trade up to their dream house.

Attorney Kallman presents a compelling answer to the question I'm hearing most often these days,  "Is now a good time to buy?"  You decide.

Legal Insider Content Contributed by Attorney Richard M. Kallman. Contact Atty. Kallman at 978-356-2934 or

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