MU financial expert says Freddie Mac and Fannie Mae Need Bailout to Keep Housing Market Afloat
July 11, 2008
COLUMBIA, Mo. – Freddie Mac and Fannie Mae – the two largest U.S. providers of mortgage finance - are sinking in the stock market, raising worries they might run short of capital and place the already burdened U.S. economy at greater risk. While the Bush administration has not offered a bailout, a University of Missouri financial expert says one may be needed.
“Freddie and Fannie are in the business of pooling home mortgages and then selling parts of the pool to investors. This allows banks to originate loans and then sell the loan to Freddie or Fannie to add to the pool. Then you – as an investor – can buy a piece of the pool, which means you ‘own’ a small piece of all the mortgages in the pool, thus reducing the risk of default to you. Comparatively, if you purchased a single mortgage owed by a single borrower, the investment risk would be much greater.” said Robert Weagley, chair of the Department of Personal Financial Planning in the MU College of Human Environmental Sciences.
In many other countries, the lending bank must maintain ownership of the mortgage, Weagley said. According to Weagley, Freddie and Fannie represent diversification at its finest and one of the reasons, historically, that the U.S. homeownership rate is quite high and the mortgage market very robust.
“Thus without this active secondary market, the unique risk of the mortgages would be more likely to stay with the bank, thus implying that the bank would demand a higher rate of return (higher interest rates) or lower risk by only loaning to blue-chip customers. Either of these actions would further depress housing markets,” Weagley said.
Weagley received his bachelor’s degree from the University of Missouri in 1974, his master’s degree from MU in 1976. He graduated from Cornell University in 1985 with a doctorate in consumer economics and housing. He has been with the MU Department of Financial Planning since 1984. Weagley also is a Certified Financial Planner. He teaches many courses on financial planning and has published numerous journal articles on educational financing, household investment, homeowners insurance, consumer confidence and retirement planning.