What do Fannie Mae, Freddie Mac, the Fed and Barney Frank have in common?

Fannie Mae and Freddie Mac have served the mortgage market through their purchase of home loans from major lending institutions.  Once purchased, these loans are securitized by Fannie Mae and Freddie Mac by issuing bonds (mortgage backed securities) which are than sold to investors like you, me, banks, mutual funds, hedge funds, and government agencies here and around the world.  This has added "Liquidity" to the mortgage market and, by doing so, has probably kept mortgage rates lower over the years than they would have otherwise been.  With the collapse of the housing market, the financial health of Fannie and Freddie was wiped out forcing the injection of tax payer dollars by the government.  These two entities are referred to as GSE's, government sponsored entities.  As such, their solvency has carried an implicit guaranty from the U.S. Government that they would not fail.  It has been reasoned that this implicit government association has also resulted in their bonds carrying a slightly lower rate.

Here's where the Fed comes in.  Since Fannie and Freddie's financial health had been wiped out, our GSE's no longer enjoy the rock solid reputation for their bonds as a safe investment vehicle.  The Federal Reserve was worried that this could curtail the sale of mortgage backed securities and thus impair the "Liquidity" of the mortgage backed security market.  All would agree that what our housing market nees now is "Liquidity" and the stable lower rates that come with it.  The Fed agreed to be a purchaser of mortgage backed securities for a limited amount of time to fill the gap left by those institutions that had curtailed or withdrawn from purchasing bonds issued by Fannie and Freddie.  The looming problem is that the Fed has announced their intention to withdraw from this role in the Spring of 2010.  So the questions is "What will happen to rates if and when the Fed withdraws from their bond purchase program?"  Keep in mind that Fannie and Freddie are responsible for the purchase of over one half of the mortgages originated in the U.S.  Our so called bond experts are predicting an increase in rates , but how much and at what pace no one knows.  Keep in mind "Liquidity" is the key.  Mortgage backed securities compete for investment dollars from around the world.  If the investing public perceives bonds issued by Fannie and Freddie as having a higher risk, the primary way to attract buying interest is to have rates drift upwards until investors believe the rate of return warrants the investment risk.  It's essential for the Fed to continue purchasing Fannie and Freddie bonds adding liquidity to the mortgage backed securities market until Fannie, Freddie, and the housing market are stonger.

Here's where Rep. Barney Frank comes in.  Barney Frank has proposed doing away with Fannie Mae and Freddie Mac and, so far, I've not seen any credible proposal from Mr. Frank on what he would replace them with.  It seems odd that Mr. Frank has taken this position.  In the period between 2003 and 2006, he was an ardent supporter of having Fannie and Freddie loosen their underwriting standards to provide mortgage funds to what Mr. Frank referred to as the under served and disadvantaged segments of the housing markets.  Needless to say Fannie and Freddie followed his advice with a passion.  It might be interesting to note that an article by Citizens Against Government Waste has reported comments by Mr. Frank over the years concerning the GSE's.  See https://www.cagw.org/ .  It's under the news tab "press releases".
So now Mr. Frank wants to do away with or replace them with another government entity.  How will this affect the "Liquidity" of the mortgage market Mr. Frank?  Do we really need another government agency?

Now you know what Fannie Mae, Freddie Mac, the Fed, and Barney Frank have in common, "Mortgage Market Liquidity".