There has been talk for a long time about combining Fannie Mae and Freddie Mac into one mammoth Government Sponsored Enterprise or GSE or the complete annihilation of both.

But would messing with these giants cause skyrocketing rates and ultra-tight mortgage lending?

First a little history. Fannie Mae was formed in 1938 to help free up banks to lend more. Fannie Mae buys mortgages, getting much-needed cash back to banks to lend out again.

In 1970, a similar organization, Freddie Mac, came onto the scene with a similar purpose.

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Rocky Times for Fannie and Freddie

In 2003 and 2004, controversy arose because of Fannie Mae and Freddie Mac’s accounting practices. From 2004 through 2007, the two of them aggressively bought risky mortgages. Once the crash happened, they both had lost billions.

“Doing something with these two has been kicked down the road since the housing crisis,” says Brad Eimer, president of the Mortgage Bankers Association of St. Louis. “There has been different proposals of how will it look.”

Needless to say, even a small decision could send shock waves through the housing market.

“There are those who do understand the impact and realize that whatever is proposed and follows through will have a huge impact on the economy,” Eimer says. “We need to be very cautious. Obviously, it is political. There is a big election ahead next year. I wouldn’t think we’d see anything proposed all next year. Maybe we’d start seeing something with some legs to it in 2017.”

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Are Fannie and Freddie part of the Government?

These entities started off as quasi-government agencies meaning a mix of public and private features. But they became private institutions with stock and investors that pulled the strings of what they did.

“They were catering to the larger players at the time like Countrywide,” he says.

Now that they are government-owned, the GSE’s cannot accumulate their profits. While that sounds good, it can also go the other way.

“We do have to do something before we see another housing downturn. If something happens again, it will be on the taxpayers,” he says.

Do Home Loans Cease to Exist if Fannie Vanishes?

Eimer says that interest rates are artificially low and have been for quite a while. If Fannie and Freddie were combined or eliminated, he feels that the interest rates would go up but not by leaps and bounds right away.

The bigger issue is what happens to the generous loan programs we enjoy.

Having such a low interest rate for a mortgage for 30 years at a time is something only available in the United States, he adds.

“We are unique in the rest of the world. We are the only country that has 30 year financing. Most have adjustable rates or more balloon or shorter term loans and larger down payments.

Some countries have no mortgage structure whatsoever. They have a cash market,” he says.

Here are some other things that could happen if Fannie goes belly up.

• Private banks would create proprietary lending programs and rules.
• There would be less standardization of rates. Comparing rates and loan types would become more difficult.
• Homebuyers would flock to government lending such as VA home loans, FHA loans, and USDA home loans.
• Flexibility could actually increase as banks were forced to experiment with alternative options like stated income loans and interest-only loans to keep profits up.

But no matter what happens with Freddie Mac or Fannie Mae, he believes that whatever takes their place will make it harder to get a mortgage.

“From a private investor standpoint, they would be more responsible for risk,” he says.

So, that means credit standards and required credit scores would go up, and interest rates would go up as well.

But Fannie Mae does not appear to be going anywhere any time soon. Home purchase and refinance shoppers can still get a great rate on a safe 30-year fixed mortgage.

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