Freddie, Fannie $200 billion mortgage bond buy underway with $3 billion purchase, FHFA's Pulte says

The news about Freddie Mac and Fannie Mae's $200 billion mortgage bond purchase, initiated by then-President Trump, delves deep into the intricate world of global finance, government intervention, and housing markets. To truly grasp its significance, especially for competitive exams in India, we must first understand the background.

**Background Context: The Genesis of GSEs and the 2008 Crisis**

Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) are Government-Sponsored Enterprises (GSEs) in the United States. Established by Congress, their primary role is to provide liquidity, stability, and affordability to the US housing market. They do this by purchasing mortgages from lenders, packaging them into mortgage-backed securities (MBS), and selling them to investors. This mechanism ensures that lenders have capital to issue new loans, keeping the housing market robust.

The historical context is crucial here. These GSEs played a central, albeit controversial, role in the 2008 Global Financial Crisis. During the housing boom of the early 2000s, they acquired vast quantities of subprime mortgages. When the housing bubble burst, the value of these MBS plummeted, pushing Freddie Mac and Fannie Mae to the brink of collapse. To prevent a systemic meltdown of the US financial system, the US Treasury placed both entities under conservatorship in September 2008, essentially nationalizing them. This meant the government took control, pumping in billions of taxpayer dollars to keep them afloat, a process that ultimately cost taxpayers hundreds of billions of dollars.

**What Happened: A New Intervention**

More than a decade after the crisis, the US housing market faced new challenges, including affordability issues. In this context, then-President Trump ordered a significant intervention: a $200 billion mortgage bond purchase by Freddie Mac and Fannie Mae. The Federal Housing Finance Agency (FHFA) Director Bill Pulte confirmed an initial $3 billion purchase, signaling the start of this massive program. The stated objective was clear: to lower housing costs by increasing liquidity in the mortgage market and, consequently, driving down interest rates for homebuyers. This move is a direct echo of quantitative easing measures employed by central banks to stimulate economies.

**Key Stakeholders Involved**

1. **Freddie Mac and Fannie Mae:** The primary vehicles for this intervention, responsible for executing the bond purchases. Their role as GSEs highlights the blending of public purpose and private structure.

2. **Federal Housing Finance Agency (FHFA):** The regulator and conservator of Freddie Mac and Fannie Mae. FHFA's Director, Bill Pulte, is a key figure in overseeing this operation and discussing the future of these entities.

3. **US Government (President & Treasury):** The directive originated from the Executive branch, underscoring the government's power to intervene in markets to achieve economic policy objectives.

4. **American Homebuyers and the Housing Market:** The ultimate beneficiaries, as the policy aims to make housing more affordable by lowering mortgage rates.

5. **Investors:** Those who buy and sell mortgage-backed securities, whose market is directly impacted by these large-scale purchases.

**Why This Matters for India: Lessons and Global Interconnectedness**

While this is a US-centric policy, its implications for India are significant due to global economic interconnectedness. A healthy US economy, bolstered by a stable housing market, generally translates to positive sentiment in global financial markets, which can benefit foreign institutional investment (FII) into India. Conversely, instability in a major economy like the US can trigger capital outflows from emerging markets like India.

Moreover, India can draw crucial lessons from the US experience with GSEs and government intervention. India has its own housing finance sector, regulated by the National Housing Bank (NHB) under the National Housing Bank Act, 1987. The government of India also actively promotes affordable housing through schemes like the Pradhan Mantri Awas Yojana (PMAY). The US example highlights the delicate balance between market forces and state intervention, the risks associated with excessive leverage, and the potential for moral hazard when institutions are perceived as 'too big to fail'. It underscores the importance of robust regulatory oversight in India's housing finance companies (HFCs) and banks to prevent similar crises.

**Future Implications: Privatization and Market Stability**

FHFA Director Pulte's statement about the possibility of privatizing Freddie Mac and Fannie Mae signals a long-standing debate. Privatization could reduce taxpayer exposure to future housing market risks but might also diminish the GSEs' ability to fulfill their affordable housing mandates. The $200 billion purchase, while intended to stabilize the market, could also be seen as another instance of government-backed market distortion.

For India, understanding these dynamics is vital. It informs discussions on the role of public sector banks and financial institutions, the extent of government guarantees in infrastructure projects, and the overall framework for financial sector regulation. The US experience serves as a powerful case study in economic policy-making, demonstrating how government actions, even with good intentions, can have far-reaching consequences across domestic and international markets.

**Related Constitutional Articles, Acts, or Policies (Indian Context)**

While no direct Indian constitutional article applies to a US mortgage bond purchase, the underlying principles of state intervention in economic affairs are enshrined in the Indian Constitution, particularly in the **Directive Principles of State Policy (DPSP)**, found in Part IV. For instance:

* **Article 38:** Mandates the State to secure a social order for the promotion of the welfare of the people, striving to minimize inequalities. Housing affordability aligns with welfare objectives.

* **Article 39(b) and (c):** Direct the State to ensure that the ownership and control of the material resources of the community are so distributed as best to subserve the common good, and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. Government intervention to stabilize housing markets can be seen through this lens, ensuring access to a basic necessity.

Furthermore, Indian policies like the **Pradhan Mantri Awas Yojana (PMAY)**, launched in 2015, aim to provide "Housing for All" by 2022 (extended to 2024), demonstrating government commitment to affordable housing through subsidies, credit-linked schemes, and partnerships. The **National Housing Bank Act, 1987**, established NHB as an apex financial institution for housing, regulating housing finance companies and promoting a robust housing finance system in India. These examples show India's own framework for state intervention in the housing sector, driven by welfare and economic stability objectives, much like the US intervention, albeit through different mechanisms.