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The Washington Independent
The Washington Independent

The Last Sucker

Liam Evans
News
Last updated: Jul 31, 2020 | Jul 11, 2008

The stock market decline of Fannie Mae and Freddie Mac is more rapid andĀ dramatic than anyone expected, but it should be no surprise that the two eventually would wind up in some sort of trouble. For years, conservatives and liberals alike have hadĀ issues with both of the entities, and although the specifics of the complaints have differed, the common theme of the complaints centered on the problematic nature of the Fannie and Freddieā€™s very existence. The two were created by Congress to provide money and stability to the mortgage markets. They are the largest buyers of home loans, which they repackage into securities for sale on Wall Street. They also are assumed to have the implicit backing of the government, even though they were converted into private companies. Hereā€™s a goodĀ backgrounder from Econobrowser. Anyway, this meant for years that everyone assumed the government would step in if their portfolios tanked, but no one really believed that would ever happen or be necessary. They didnā€™t believe it because that would put the government in the position of being the last sucker if the housing market were to collapse and mortgages go sour.

So mortgage companies and banksĀ complained Ā for years that Fannie and Freddieā€™s implied government backing gave it an unfair advantage in the marketplace. On the other side, community groups and housing activists maintained that the two put market interests above their mission to promote homeownership. When Fannie Mae moved to quickly get foreclosed properties off its books, activists in ClevelandĀ charged that Fannie turned the properties over to speculators who only added to neighborhood blight. When Fannie and Freddie, to stay competitive, waded into the subprime market, legal aid lawyers who deal with predatory lending victimsĀ contended Ā their presence encouraged more abusive subprime lending.

Now fears that the two will run out of capital and the government will beĀ required Ā to rescue them are roiling Wall Street. Some of this fear may be tied to the often irrational behavior of the financial markets. But thereā€™s probably more to it; in the back of many an investorā€™s mind is the realization that "last sucker" theory could come true. As economist Dean BakerĀ notes, itā€™s time to look back at the warning signs and figure out why regulators and analysts didnā€™t take this possiblity more seriously. And why Congress ever set up the government to become the mortgage marketā€™s last sucker in the first place.

Liam Evans | Liam Evans is a freelance writer and social media manager who specializes in assisting finance professionals and Fintech entrepreneurs in growing their online audience and attracting more paying customers. Liam worked as a bank teller and virtual assistant for financial firms in the United States and the United Kingdom for six years before beginning her writing career.

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