Fannie Mae, Freddie Mac and Ginnie Mae have
been playing a greater role in the overall
mortgage market since the housing decline
began in 2006. How long will this last? When will
the private market return? What will be the long-
term effect on the market?  

Fannie Mae, Freddie Mack and Ginnie Mae (GSEs*)
have traditionally played a large role in owning or
guaranteeing of mortgages underwritten in the US.  In
2000 they insured almost 60% of the total single-
family mortgages. Non-government financial
institutions underwrote around 20% of mortgages.
Bank institutions, such as Savings and Loans held
most of the remaining 20% of mortgages.

Shift forward to 2005, at almost the height of the
housing bubble, the amount underwritten and
securitized by non-governmental institutions had
greatly increased their share. The breakout in 2005:
Government sponsored was 42% of the total
mortgages, non-government financial institutions were
up to 40% of mortgages. Bank institutions were down
slightly to around 18%.

Of course, it’s a matter of history that a significant part
of the growth in mortgages was in the sub-prime
sector, and this would later come back to haunt the
housing industry and the entire financial system. With
that collapse came the almost complete withdrawal of
the non-government sponsored mortgage loans. So
by the end of 2010 the breakout is:  Government
sponsored loans are 95% of the total mortgages, non-
government financial institutions are down to 3%.
Bank institutions were way down to around 2%.

So private entities have almost disappeared from the
mortgage lending landscape. Of course, at the same
time the entire total market volume for single family
mortgages has contracted from 2005 to 2010, from
7.3 million down to 6 million. So five years later the
market volume is 18% lower. And the reduced current
volume is comprised almost entire by the GSEs*.   

The government has largely increased their market
share through increased FHA originations, with funds
flowing through Ginnie Mae. In 2005 the FHA insured
about 2% of single-family loan originations in the
country.  By In 2010 the FHA will be insuring about
17% of all new single-family originations. Most of the
rest are conventional mortgages also guaranteed by
the GSEs. So the story for the entire market is
contraction, and within that market we have increased
volume running through the FHA. The increased FHA
activity is generally considered to be good. If not for
them the housing market would have take an even
further dive.

An interesting side-note to the increased FHA
presence is that the average amount of equity that a
borrower is bringing into the loan transaction is
actually going down, despite higher lending
standards. For the FHA in 2005, the percent of
transactions where 10% or less of a down payment
was made was approximately 60%. In 2010 it is 80%.
This is largely a function the 3.5% only down payment
requirement of the FHA.  However the average credit
score has gone up during this period.  

One of the big impediments to the immediate future
growth of the non-GSE market are higher credit
standards. Obviously higher credit standards will be
required for any loans that are to be securitized and
sold in the secondary market. But with home values
down 30% on average since the peak, aggregate
incomes down with 10% unemployment, and assets
depleted, a large chunk of the borrowing universe no
longer qualifies for loans.  And with tightened lending
standards the situation is even worse. So essentially
the bottom of the market has gone away. The market
that remains largely wants a government guarantee.
The demand isn’t there for the mortgage-backed
securities. It may take a long time to lure investors
who were previously burned to get back in the

The governments own objectives state that they
desire to be a counter-cyclical force in the housing
and mortgage market. Certainly they seem to be
playing that role at this time. Of course, by doing that
they incurring the risk of guaranteeing virtually the
entire mortgage market. That means any losses will
ultimately be borne by the taxpayer. The risks are two
fold: First, the risk of the loans defaulting, and second
the price risk of the mortgage securities they hold.
Price risk is caused by both prepayment and interest
rate risk. Are the government and the taxpayers
prepared for this risk?

These issues raise questions. For whose benefit is
this risk being taken? Someone who chooses not to
buy a home, or who has a relatively small mortgage
may ultimately be subsidizing those who have taken
big mortgage loans.  Of course, it may be argued that
a healthy housing market and economy ultimately
benefits all to some degree. These are issues that
everyone needs to be made aware and to consider
carefully when deciding what policies they support.      

* Government Sponsored Entities

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Fannie Mae, Freddie Mac, Ginnie Mae
and the Future of the Mortgage Market.
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