Kanye West isn’t right about a lot but is he right when said: ”No one man should have all that power” ?
The most powerful man in the world might not be who you think it is.
Before the most recent State of the Union address, I began to think about how the president was not only addressing the United States — he was essentially addressing the world. I say this because Americans aren’t the only ones who have a vested interest in our country; many foreign economies also depend on the prosperity of America. So, when it’s said that the President of the United States is the “most powerful man in the world,” it seems to be true. Yet there is a very close second, in my opinion, and it’s probably a man many of you haven’t heard of. His name is Mel Watt, the director of the Federal Housing Finance Agency (FHFA). If you’re not familiar with the FHFA, it’s an independent, government-sponsored enterprise that regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. The FHFA was established in 2008 under the Housing and Economic Recovery Act in reaction to the financial meltdown that led the American economy into recession. So, why is this a big deal?
Fannie Mae was created during the Great Depression as part of FDR’s New Deal. Its purpose was to help the mortgage market by securitizing mortgages with federal money. This is where the term “mortgage-backed securities” comes from. A mortgage-backed security allows lenders to put more of their assets into lending. That way, instead of the lender relying on local banks for money, the lender can issue more loans simply by buying FHA-insured mortgage. In turn, this increases the number of lenders in the market. The more lenders in the market, the more competitive the market will be, which helps the borrower (you) in the long run.
Fannie Mae dominated the secondary mortgage market until Freddie Mac was created in competition to generate a more efficient market. After the pitfalls of the 1980s, Fannie and Freddie were pressured by the federal government to participate in the financing of affordable housing for low- and moderate-income families. The government’s goal was to have both of these GSEs (government-sponsored enterprise) purchase low- to moderate-income mortgages at 30 percent each. Towards the end of the 1990s, pressure from the secondary market to ease credit requirements on these mortgage loans created a lending practice that is now known as the subprime market.
What does this mean?
This subprime market meant a wiliness to securitize risky loans. Let’s remember that Fannie Mae and Freddie Mac are private entities sponsored by the government, so they do have shareholders to please. Money was to be made with lower underwriting standards, so pressure from shareholders led Fannie and Freddie to lower those standards. This allowed banks to change the type of mortgage products they loaned to borrowers. Mortgage products such as traditional fixed rate were traded in for nontraditional, non-amortizing ARMs and overall riskier loans. Banks did this because these loans were backed by insurance that Fannie and Freddie would pay back.
We know how the rest of the story goes: An oversupply of underpriced mortgages welcomed subprime borrowers who eventually defaulted. Then came foreclosures, then came bailout, then came recession. FHFA estimated that in 2010, it cost $360 billion to bail out Freddie and Fannie. So, what does this mean on a global scale? In 2008, Fannie and Freddie were officially put into conservatorship, allowing the U.S. Treasury to advance funds to them. This increased the national debt to $800 billion. China owns about $1.37 trillion dollars in U.S. Treasury bonds — many of which include mortgage bonds. A defaulting of Freddie and Fannie would result in a massive global economic disaster.
By now, I hope it’s clear that Fannie and Freddie play a significant role in our American and global economies. These GSEs are under the power of the FHFA, which is an independent federal agency that, although constitutionally part of the executive branch, is independent of presidential control. This agency, whose rules have the power of federal law, is run by one man: Mel Watt. Check out the next installment of the Mortgage Story by Victor B.R to learn why you should pay more attention to whom I consider to be one of the most powerful men in the world.
These two are very close 3rd!
Thanks for reading,
The Mortgage Story By Victor Brown-Roberson
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