Remember Fannie Mae and Freddie Mac? The two government-sponsored enterprises (GSEs) that were taken into government conservatorship more than eight years ago. Effectively, the government takeover of these quasi-private mortgage insurance enterprises. The takeover took the form of a $187 Billion bailout ($200 Billion was made available). To date, approximately $240 Billion has been repaid to taxpayers. That’s $60 Billion more than the bailout.
In 2012, the terms of the conservatorship were changed enabling the Treasury Department to funnel all profits from Fannie and Freddie into the general fund to help pay down the government debt. This is preventing Fannie and Freddie from rebuilding capital reserves and liquidity that should be used to guarantee more private mortgages.
However, both companies remain under conservatorship. Today, there is growing demand to end the conservatorship. This is a highly complex financial situation because Fannie Mae and Freddie Mac effectively control the availability of financing for homeownership in America and since housing equates to roughly 20% of GDP it is one of the most important parts of the economy.
When his selection was announced in November, then Treasury Secretary-designate Steve Mnuchin stated that getting Fannie and Freddie “out of government control” would be a “top ten” priority for the new administration. In this week’s testimony before the Senate Banking Committee, Treasury Secretary Steven Mnuchin said that studies and conversations are currently taking place to restructure these GSEs before removing them from conservatorship. However, practically all GSE reform options require congressional action (oxymoron). Along with balancing the interests of a large number of stakeholders, this creates many proposals for policy makers to weigh. The bigger category this important subject falls under is the congresses’ Housing Finance Reform.
Mnuchin’s stated goal to the Senate Banking Committee is to assure the GSE’s liquidity and assure middle income taxpayers accessibility to mortgage financing (at the exclusion of lower income accessibility?) while not putting taxpayers at risk. His intention is focusing on this issue during the second half of 2017. This was Treasury Secretary Steven Mnuchin’s first appearance before the U.S. Senate. A Presidential Executive Order signed in February requires the Treasury Secretary to report within 120 days on federal regulations supporting or inhibiting the U.S. Financial System. Housing Finance Reform certainly qualifies here. In an even larger scope, this includes a review of the Dodd-Frank act.
Among the many options going forward is the full privatization of mortgage guarantees. In fact, Mnuchin said a primary question to be answered is whether or not there should remain government guarantees for mortgages. Broad changes at this high level will have consequences in practices across the $11 Trillion residential real estate industry and much further.
Were Fannie and Freddie to be replaced with a fully privatized system, it would require a massive recapitalization of the existing mortgage system. Beginning with the $5 trillion in mortgage guarantees currently on the books of Fannie and Freddie. It would require a new conglomerate of banks, mortgage insurers, and other investors that do not have such immense amounts of capital waiting to be deployed.
The plan to reform, recapitalize, and release the GSEs must respect the rights of all shareholders and be in the best interests of American taxpayers, homebuyers, and capital markets. Of particular concern to the housing industry is the future availability of mortgage credit and the significant pressure on interest rates that privatization will effect.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
It is time that Fannie and Freddie were released from conservatorship and that shareholders are fairly compensated if their private property is taken by government for public use. Teh judges are afraid to rule in favor of the shareholders as they are dominated by corrupt politicians. The bankers' lobby needs to stop. First we thought that Mnuchin was going to step in and do something right, but htat seems like a remote possibility as he has to keep a balance and please his peers. Mel Watt has already indicated that Fannie Freddie have been reformed enough and are on the way to churning profits. We will wait to see who bells the cat !
This illegal taking from us shareholders must end and restore our rights. First the net sweep is unconstitutional and reading the state regulations governing Fannie operations it is clear the feds violated their charters whereby no senior shareholder can grab all dividends/profits at the exclusion of all "junior" investors. Yet no court has yet to recognize this. It is downright theft. Lastly this business that they both were about to go under during the crisis was all BS. The books were cooked by the auditors and one auditor
has paid a significant penalty and the other suit is still in the works. Fannie was not in trouble in 08 as so many thought. This was a golden opportunity to grab billions from us investors.
Thanks you for your input. This subject is worthy of further comment, opinion, and discussion.
I second John's post. If you look at all the evidence, you will see a complete fraud and theft by the US government, as they cook the books and manipulate the US justice system to create a slush fund of billions off the records. Present day reformers in Congress are only there to steal the money and shaft the rightful owners, retirement funds, 401(k)s of individuals, and the like. We are not hedge funds!
Obviously, it didn't turn out to be the conservative investment people were told it was. Does anyone have thoughts about what should be done as it emerges from conservatorship?
Extinguish the warrants. Eliminate the NWS. Charge a reasonable interest rate retroactively. Release from conservatorship with a LOC until 2% reserves is saved, or whatever would have carried the GSEs through 2008 if the FHFA hadn't illegally written down the DTAs that only existed because the GSEs are being treated harsher than the TBTF banks.
All the other TBTF Banks paid their loans and the government withdrew. They are all now highly profitable. The lawsuits so far did not get to the crux of the issue--quibbling about whether the Conservator had the authority to require the profit sweeps. The Federal Court of Claims lawsuit will decide the real issue which is the-taking without due process. Also, since F and F are chartered under the Delaware Corporation law and it is clear the FHFA Conservator, Mel Watt, exceeded his authority by issuing dividends that excluded preferred stockholders from receiving any dividends. But there is no doubt that the GSEs were Communist entities established to rape F/F shareholders by plummeting their share price to nowhere near their true value and getting them kicked off the NYSE. It is an incredible story of governmental chicanery.