Fannie and Freddie – Eight Years and Counting

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.