Fannie-Freddie Overhaul

Posted by kevin on April 15, 2014 under Foreclosure Blog | Comments are off for this article

Since the federal bailout of Fannie Mae and Freddie Mac (the GSE’s) in 2008, there has been a call for their overhaul. The question is, what is a suitable replacement?

Yesterday, there was an article by Ken Blackwell, former undersecretary of HUD and mayor of Cincinnati (how many n’s, how many t’s) and now a director at the Coalition for Mortgage Security. The stated purpose of the Coalition is to educate the public concerning housing policy and finance. The article says that the coalition wants to preserve the 30 year fixed rate mortgage.

In this article, Blackwell states that there is broad consensus in Washington that the GSE’s should be replaced by a private mortgage secondary market funded by private capital with a limited government role.

Blackwell has a bone to pick with the feds. He points out when the federal government bailed out Fannie and Freddie, it took 80% ownership interest. Now that the government has been paid back, it is claiming still 80% ownership but 100% of the profits of the GSE’s. In effect, the feds have screwed the shareholders of the GSE’s. By creating and maintaining such a policy, Blackwell claims that investors will be very reluctant to jump into any new private mortgage financing vehicle.

Implicit in the article, however, is that the Coalition fully expects the government to be there in case of future meltdown. So, the private market is not really a private market.

Yesterday, the WSJ ran an editorial relating to the reform of Fannie and Freddie. It discussed in some detail the Johnson/Crapo bill which would replace the GSE’s with multiple private mortgage bond issurers that would each have a taxpayer guarantees. To get those guarantees, the issurers would need to maintain (over time) a 10% capital level vis-a-vis aggregate mortgage loans.

The editorial rails on against provisions in the bill which encourage and subsidize loans to people who are not creditworthy. On the other end of the spectrum, the editorial states that while the median price for a home in the US was $189,000, a borrower could borrow as much as $625,000 and have that loan backed up by the feds. WSJ questions whether the government should be subsidizing the somewhat wealthy on their home purchases.

From my viewpoint, it appears that the politicians want to get rid of Fannie and Freddie while at the same time keeping Fannie and Freddie. Different groups want to dump the aspects of the programs they do not like, and keep the one’s they do like. Seems like a lot a work to end up pretty much at the same place.