They were used to being seen everywhere together, a couple with common goals though each pursued an independent course.
So mutual friends were shocked when they split recently, starting a fight over assets that promises to be bitter.
Freddie and Fannie were always competitors of sorts, though she was older and richer. But now Freddie wants to move in on Fannie's territory, just as she has fallen on hard times. The stakes are higher and the once good-natured competition has turned into a grudge match.
When the Federal Home Loan Mortgage Corp.--Freddie Mac--was created 11 years ago, it was designed to put more money into the mortgage market by buying conventional loans (those not insured by FHA or VA), mainly from S&Ls. Its funding comes from the 12 federal home loan banks.
Now it wants to become a larger, private organization, emulating the Federal National Mortgage Association--FNMA or Fannie Mae--which is the largest single holder in the country of home mortgages, mainly FHA- and VA-insured loans. To do this Freddie Mac would largely break its tie with the federal government and start selling stock to investors, like Fannie Mae does, to raise more money for expanded operations. And it's profits, like Fannie Mae's, would become taxable.
The White House announced earlier this week that it is supporting the Freddie Mac proposal, as part of the administration's goal of increasing the private sector's share of secondary mortgage market activities.
All of this has Fannie Mae quietly panicked.
And, as in other unfriendly splits, Freddie and Fannie are now talking through their lawyers.
"It's a real p-----g contest, and there are a lot of memos that have been going back and forth on the thing" between the two, said one informed observer.
The outcome of the tug-and-pull has broad implications for future homebuyers, because the two are in the business of getting more funds into the mortgage market. How they do their business helps determine how much money is available for home loans and what kind of mortgage terms become standard in the marketplace.
Fannie Mae first started fighting behind the scenes. It recently sent out a five-page "analysis" of the Freddie Mac proposal to key congressmen, outlining its objections to the plan--but with no identification on it that it was a Fannie Mae document.
While Freddie Mac says its new powers would add healthy competition to the secondary market--and ultimately reduce costs to homebuyers--Fannie Mae says the plan would destroy it through unfair competition--and ultimately increase costs to homebuyers.
Fannie Mae also argues that increased capabilities for Freddie Mac would put a strain on the credit markets, adding to upward pressure on interest rates, and that the plan does not address the primary issue of housing affordability.
The unfair advantage, Fannie Mae says, lies in the fact that it is suffering serious losses on its portfolio of low-yielding mortgages, which is not a problem for Freddie Mac. Fannie Mae has said its attempts to reverse its fortunes would be thwarted by the new and formidable competition envisioned by the Freddie Mac bill.
"Any such 'competitor,' without FNMA's tremendous backlog of low-interest mortgages, would enjoy an unfair advantage over FNMA. . . . Such a competitive imbalance would inevitably hurt the American home buyer by forcing FNMA to cut back, particularly on the purchase of assumable FHA/VA loans," the analysis by Fannie Mae stated.
But friends of the Freddie Mac proposal argue that Fannie Mae merely doesn't want competition at all and that its arguments about injury are specious.
"They can't say, 'We don't like the competition.' Hell, GM doesn't like competition from Ford. They aren't going to get very far with that argument," said one person involved in the issue. Fannie Mae's best chance for getting the idea killed is to show significant injury to its operations, but even this is tricky and led the organization to try to promote opposition surreptitiously, he added.
"If they are going to take on the legislation in front of God and the marketplace and strip down and show that injury, that's not very good for business," this analyst said.
A Fannie Mae spokeswoman said the analysis was provided because of interest in Congress in the group's views on the legislation.
Freddie Mac has countered some of Fannie Mae's objections with changes in its legislative proposal, in an attempt to diffuse the injury argument, but Fannie Mae is still opposing the idea.
Freddie Mac and Fannie Mae are two of three national institutions that create a secondary market for mortgages, designed to pump money back into the mortgage market by transforming home loans made by primary lenders into securities, which are sold to investors. The other is the Government National Mortgage Association--Ginnie Mae.
Up to now, the three have operated with basically the same goal of making more mortgage funds available but have functioned in different ways with varying degrees of ties to the federal government, which created each of them.
Fannie Mae was originally chartered in 1938 as a government entity but almost completely severed its federal ties in 1970 in a restructuring that included the creation of Ginnie Mae. It is now a private, profit-motivated corporation that operates basically as a giant S&L.
Ginnie Mae is a federal entity that backs FHA- and VA-insured loans. The administration wants to phase out its operations completely as soon as the private markets can take over its functions. Ginnie Mae supporters say the private markets simply aren't prepared to do this now, because Ginnie Mae backs such a large amount of mortgages--about $48 billion last year.
Freddie Mac, formed in 1970, was created to buy conventional mortgages, complementing Ginnie Mae and Fannie Mae programs for FHA and VA loans.
In its first 11 years, Freddie Mac has bought and sold about $25 billion worth of conventional residential mortgages, all it could with the federal capital available to it.
If Freddie Mac did not rely on funding by the federal home loan banks, as it now does, it estimates it could raise enough money from private investors to put $30 billion to $40 billion a year into the mortgage markets, more than in the first 11 years combined. At this level, about 600,000 home buyers could get mortgage financing, Freddie Mac says.
"The amount of mortgage financing needed is measured in the trillions. There is no way anyone can provide that much money," said Henry Judy, vice president and general counsel of Freddie Mac.
The reason for the extraordinary need is the drying up of traditional mortgage sources, particularly the accumulated amounts of small savings that until recently went into passbook savings accounts at low-interest rates at savings and loan associations. With consumers no longer willing to accept 5 1/2 percent interest rates for their loans, S&Ls have had to offer higher-yielding instruments.
The Freddie Mac recapitalization proposal, as it is called, would be a new mechanism for transferring large amounts of investor capital into mortgages via the stock market.
"Your average homeowner is competing with General Motors for funds," Judy said. "Now with recapitalization both will be going to the same capital market."
The recapitalization plan has an impressive list of supporters in the mortgage field, including the Mortgage Bankers Association, the U.S. League of Savings Associations, American Bankers Association and securities dealers.
In addition to administration support, it has formidable backing in the Senate. The bill was introduced by Senate Banking Chairman Jake Garn (R-Utah), along with Housing subcommittee Chairman Richard Lugar (R-Ind.) and Sen. William Proxmire (D-Wisc.)
On the House side, members generally haven't focused on the issue yet, though House Banking Committee Chairman Fernand St Germain (D-R.I.) may want to hold up consideration until the committee takes up proposals for a comprehensive restructuring of financial institutions, a staff aide said.
This, Freddie Mac argues, could be disastrous for its cause.
"Without passage of this legislation during 1982, the $24 billion level of support the corporation is providing this year is in jeopardy, as are our plans for even higher levels of support next year--unless substantial new fees are levied on all" Freddie Mac users, states a letter that Freddie Mac sent last week to supporting groups.
But this strategy could backfire if the group poor-mouths too much, one supporter warns.
"If they make that case" that Freddie Mac has to have recapitalization this year and the bill fails to pass and the corporation suffers no injury next year, he speculated, "Freddie's credibility could suffer" and endanger its chances of getting what it wants.