Fannie and Freddie: A Phoenix Rising From The Ashes? Or Ashes?

Confounded Interest ^ | 03/22/2013 | Anthony B. Sanders

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The government sponsored enterprises in conservatorship, Fannie Mae and Freddie Mac, are generating attention in Congress. For example, here are recent headlines (courtesy of WilmerHale).

* Corker and Warren Unite on GSE Reform. Here is their bill.

• As described in the Bipartisan Policy Center’s executive summary, the BPC plan would replace Fannie and Freddie with a new government entity that would insure qualifying MBS with an explicit government guarantee that would kick in only if mandatory private credit enhancement, e.g., private mortgage insurance, failed to reimburse credit losses on the re-insured MBS. • FHFA Acting Director DeMarco previously announced that Fannie and Freddie will establish a securitization platform equipped to function as a common market utility in the event of reforms to the secondary mortgage market. That platform could resemble the single securitization platform contemplated by the BPC plan.

* House Financial Services Committee to Consider Bill to Wind Down Freddie and Fannie. Here is FHFA’s Acting Director Ed DeMarco’s testimony.

• House Financial Services Chairman Hensarling (R-TX) stated at a recent committee hearing that the committee will soon consider a bill to wind down Fannie and Freddie. Chairman Hensarling said that the bill would “once and for all abolish Fannie and Freddie.” • On a related note, FHFA Acting Director DeMarco’s written testimony seemed to challenge the consensus view that a government guarantee of some sort is necessary to ensure adequate housing finance. DeMarco stated: “I have been observing a developing ‘consensus’ among private market participants that the conforming conventional mortgage market cannot operate without the American taxpayer providing the ultimate credit guarantee for most of the market. As I have noted, that clearly is one policy outcome, but I do not believe it is the only outcome that can give our country a strong housing finance system. . . . I believe it is possible to rebuild a secondary mortgage market that is deep, liquid, competitive, and operates without an ongoing reliance on taxpayers or, at least, a greatly reduced reliance on taxpayers, if that is what we set our minds to accomplishing.”

* Ryan Budget Would Scrap Fannie and Freddie. Here is the Ryan budget.

• Rep. Ryan’s budget “seeks to drastically decrease the market dominance of Fannie Mae and Freddie Mac by gradually ending their government guarantees and taxpayer subsidies.” • His budget would also require the use of fair-value scoring for federal housing credit programs in an attempt to better reflect taxpayer risk.

And on the FHA front, Waters and Capuano Reintroduce Bill to Strengthen FHA. Here is their bill.

• Reps. Waters (D-CA) and Capuano (D-MA) reintroduced the FHA Emergency Fiscal Solvency Act, which would authorize FHA to take certain steps designed to bolster its insurance fund. • The bill would, among other things, give FHA more flexibility to take action against loan originators engaged in faulty underwriting and would also authorize FHA to require indemnification for improperly underwritten loans.

So many bills, so much to consider.

The question ultimately boils down to your vision of government in your life. That is, are you a fan of limited government or sprawling leviathan?

Hersarling (R-TX) has the clearest vision of Fannie and Freddie’s future (downsize and ultimately shut them down). On the opposite side of the spectrum, Waters (D-CA) and Capuano (D-MA) seek to simply bolster the existing insurance fund (at least for the FHA but from previous testimony I assume that both support keeping Fannie and Freddie in place as is.

Here are important questions that should be addressed.

1. Why do we need Fannie, Freddie, the FHA and the Federal Home Loan Banks doing many of the same operations? FHFA has already moved to a common platform for securitization.

2. As someone in DC once told me, Fannie and Freddie are the lending arms of the Democrat Party. Do we really want politically motivated lending standards? We already have the opaque FHA doing politically motivated lending, can’t we at least kill any connection between politics and Fannie and Freddie? Such as protecting them from affordable housing goals (remember Barney Frank (D-MA) pressuring Fannie and Freddie to take on more and more risk?).

3. The Consumer Protection Financial Bureau is one of the potential obstacles to housing reform (paradoxically) as well as Dodd-Frank. Taken together, they require MORE government involvement in markets, not less. And there is a deviance between rules for originators and banks and the government housing complex that encourages the perpetuation of … The government housing complex.

4. Fannie Mae is back in the low down payment game .. again. Even if they can do it, do we really want the FHA competing with Fannie and Freddie in a race to the bottom? To quote Ian Malcolm from Jurassic Park, “Your scientists regulators were so preoccupied with whether or not they could, they didn’t stop to think if they should.”

So, should the government be the backstop for mortgages? The answer is no, but that is likely where Congress ends up. Even I recommended the government backstop in my paper with Satya Thallam for the American Action Forum. And I did it with a heavy heart.

http://americanactionforum.org/sites/default/files/AAFsinglefamilyThallamSanders.pdf

It is a second best solution. Congress, the Administration and affordable housing lobby will never withdraw the government from the market. So we have to control the future damage in way that is palatable to Congress. Even I recommended the government backstop in my paper with Satya Thallam for the American Action Forum. And I did it with a heavy heart.

http://americanactionforum.org/sites/default/files/AAFsinglefamilyThallamSanders.pdf

It is a second best solution. Congress, the Administration and affordable housing lobby will never withdraw the government from the market. So we have to control the future damage in way that is palatable to Congress.

Recently, Fannie Mae and Freddie Mac stocks have been showing some life. Is it due to declining foreclosure and increasing profits (which go to Treasury)? Or is there a sense in the market that Fannie and Freddie will rise from the ashes like The Phoenix?

The long-term:

The short-term:

And don’t forget that FHA, Fannie and Freddie are in the multifamily housing market too. They are everywhere!

[whitedog57]

They're everywhere!!!!