Q&A Time: Fannie Mae and Freddie Mac

Question: I thought that the government was about to shut down Fannie Mae and Freddie Mac because they fell short due to the economy crash, and they were looking for a buyer to get rid of this company forever. I heard China wants to buy them. Isn’t that crazy to see a foreign country buy up property in America?

Answer:

• The question is more of is there a reason to liquidate Fannie Mae and Freddie Mac, and if so, who should take over.
• You cannot unwind Fannie and Freddie so easily as they are now government organizations.
  • In fourth quarter 2009, Fannie Mae had less than $900 billion on its balance sheet.
  • One quarter later, Fannie Mae has a $3.2 trillion balance sheet.
    • All of the mortgage-backed securities the government bought were funneled through Fannie Mae.
    • Bailing out Fannie Mae and Freddie Mac in the middle of the financial crisis when housing prices were plummeting was the right thing to do.
• In reality, the purchase of Fannie Mae or Freddie Mac would be a purchase of financial assets similar to buying any other security, but not actual real estate.
  • In this case, the purchaser would receive a company with a great amount of debt and it would raise questions as to the implicit backing of the U.S. Government.
  • If China were to buy our property, it could be a positive thing.
    • However, it seems like a long shot considering the Federal government’s current level of involvement and the fact that these entities are at the heart of the U.S. real estate market.
  • Recall that Freddie and Fannie are referred to as government sponsored entities or GSEs.
    • That would make any purchase by an outside sovereign government difficult to understand, although it has been reported China is the largest lender to the U.S. market at this time in that they buy more Treasury bonds than any other outside government.
  • If China were to buy these distressed properties, it would get them off our books.
    • When foreign nations have purchased property in the past, we have been able to buy it back at pennies on the dollar when they needed money.

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