Advantages to Freddie Mac, Fannie Man and Ginnie Mae

In the previous article, we covered the history and the roots of special government agencies called Freddie Mac, Fannie Man and Ginnie Mae. We understood that these organizations are hybrid in nature and that their stock is sold on the stock exchange whereas at the same time, they have a government charter! The exact nature of these organizations is subject to a lot of debate.

The foremost question that arises is that the stockholders of a government company will obviously have some major advantages over their private counterparts. In the case of Freddie Mac, Fannie Man and Ginnie Mae this was most likely true. In this article, we will cover this question in detail. Let’s have a look at some of the special advantages that were conferred upon Freddie Mac, Fannie Man and Ginnie Mae.

Implicit Guarantee

The market had a collective belief that agencies like Freddie Mac, Fannie Man and Ginnie Mae cannot fail. This is because they are partly the creation of the government. This belief also turned out to be true. When the crisis finally broke out in 2008, the first people to receive help were these government agencies.

The Federal Government had provided billions of dollars in lines of credit to these agencies as a part of their charter. Hence, even in a non crisis situation, these agencies could simply borrow money from the government. When the crisis did break out, the government was forced to extend these credit lines by many more billions and immediately rescue Freddie Mac, Fannie Man and Ginnie Mae.

This is because the market bought these loans on the assumption that the US government and the US taxpayers were implicitly backing them. A failure on the part of Freddie Mac, Fannie Man and Ginnie Mae to repay their loans would imply a failure of the United States government and that would be the beginning of a world-wide catastrophe.

Agency Bonds

As we can see from the above point that the securities sold by Freddie Mac, Fannie Man and Ginnie Mae were relatively risk free. Hence if you were a lender in the bond market, lending money to these agencies would also be considered relatively risk free because there was an implicit backing of the US government.

It is for this reason that the bonds issues by these agencies to raise money were issued at a lower rate of interest than the private parties. There were three categories of bonds in the market i.e. the government bonds, the private bonds and a brand new category called the agency bonds which reflected the higher than government but lower than private risk of these agencies.

Freddie Mac, Fannie Man and Ginnie Mae got an advantage of 25 to 40 basis points in the bond market. This is a huge advantage when it comes to consistently borrowing billions of dollars. Hence, many critics argue that these agencies had special powers in their charter which enabled them to grow beyond their size and later cause catastrophic default.

Higher Yields

Freddie Mac, Fannie Man and Ginnie Mae had lower borrowing rates. This meant that they could lend at higher rates and then always make a risk free profit. This would be outrageous since the government would have created a private entity that is guaranteed profits by government charter!

While many critics argue that this was indeed the case, the government, Freddie Mac, Fannie Man and Ginnie Mae all deny these allegations vehemently. The governments side of the story is that 75% of the savings accrued as a result of lower lending rates to these agencies were passed on to the borrowers. There have been several statistics published to justify this claim.

However, everyone familiar with the issue and not having any vested interests will agree that Freddie Mac, Fannie Man and Ginnie Mae indeed had special privileges

Exempt From State and Local Taxes

One of the biggest privileges that were bestowed upon Freddie Mac, Fannie Man and Ginnie Mae was the fact that they were exempt from state and local taxes. Since they were government bodies chartered by federal law, they were not under the purview of state and local tax agencies. Hence, while their competitors had to pay state and local taxes and increase their input costs, Freddie Mac, Fannie Man and Ginnie Mae had no such compulsion!

When you add together low interest rates and tax exemption, the picture of why these agencies held a monopoly over the secondary mortgage market became clear.

Exempt From Regulations

Lastly, Freddie Mac, Fannie Man and Ginnie Mae were not subject to the same regulations as commercial banks or investment banks. In the US, banking had been a highly regulated industry and complying with the regulations cost a lot of money, time and severely restrict the ability of an organization to engage in trade.

Freddie Mac, Fannie Man and Ginnie Mae did not face these limitations to the full. Sure, there was regulation of these quasi government agencies as well. However, it was nowhere as stringent as those imposed on the banks.

To sum it all up, Freddie Mac, Fannie Man and Ginnie Mae had major advantages over their competitors. These advantages were no earned in the open market rather they were simply bestowed upon them by the government. Hence, later when tax payer dollars were used to pay up the bill of an already over privileged corporation, there was a massive hue and cry.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.