Posted on 02/26/2017 6:24:16 PM PST by Lorianne
One unresolved issue from the financial crisis is the future of Fannie Mae and Freddie Mac, the two firms that stand behind much of America’s housing market. Fannie and Freddie purchase mortgages, bundle them into securities and sell them on to investors with a guarantee. When America’s housing market collapsed a decade ago, the government had to bail them out. Its treatment of the firms since then has created a titanic legal struggle. Shareholders have cried foul. On February 21st, a federal appeals court upheld a ruling in the government’s favour. At issue is the Obama administration’s decision in 2012 to hoover up all of Fannie and Freddie’s profits. Until then, it had received a fixed dividend on its investment. The timing of the shift was striking—just before a surge in the firms’ profitability. Since 2008 the Treasury has sucked in about $250bn from the firms, 30% more than the cost of the bail-out.
The change enraged hedge funds who had bought Fannie and Freddie’s shares and found themselves expropriated. The investors’ lawsuit held that the government overstepped its authority by seizing all profits. A federal court dismissed that claim in 2014; it has taken until now for an appeals court to uphold the most important parts of the decision. An odd aspect of the ruling is that it largely ignored the substantive arguments but concluded the court lacked the authority to curb the government’s actions. Its ruling sent shares in Fannie and Freddie tumbling (see chart). That reversed about half of the rally sparked by Donald Trump’s victory in the presidential election. Investors reckon that Mr Trump’s administration will be more favourable to Fannie and Freddie’s investors. Initially Steve Mnuchin, now treasury secretary, told a business-news network that Fannie and Freddie should be privatised again.
But in his confirmation hearing before the Senate in January, he seemed to roll back those remarks. The firms are hardly robust. The Treasury is running down their capital by $600m a year. By 2018 they will have none left. From then on, should the firms make a loss, they will need to draw on an emergency line of credit from the government. Doing so would be characterised by some as a second bail-out. That worrying prospect should provide some impetus to the search for an alternative solution. But it will be hard to find an ownership structure for Fannie and Freddie that satisfies everyone. The firms keep mortgages cheap by lumping taxpayers with a staggering amount of risk. (If the housing market collapsed, the cost to the Treasury could be 2-4% of GDP, according to an analysis by The Economist). Few will want investors to make profits on the back of such a taxpayer guarantee.
Obama & Pals overstepping their authority? Isn't that what Rules For Radicals was all about?
If you want the gubermint to bail you out - don’t act surprised when it rapes you later.
On the other hand they should not have been forced to lower their credit standards to begin with.
Uncle Sam needs to get out of artificially supporting home ownership. All crony capitalism needs to end.
Taxpayers should never have been put at risk for other people’s mortgages in the first place.
Amen. And lots of private firms should have been allowed to go belly up, including Goodman Sachs... and many more.
Almost a week old ,, but important enough to revisit... http://www.zerohedge.com/news/2017-02-21/fannie-freddie-plunge-after-court-rules-hedge-funds-cant-sue
Letting the government into a business is like the old story of giving a snake a ride - eventually it will turn and bite you, because that’s what snakes do.
Ask the General Motors bond holders about the government overstepping its’ boundaries. They were outright robbed!
After Gorush is confirmed, appeal to the Supreme Court.
I think Fannie and Freedie should not be “privitized” in the sense of the companies remaining in business as “private” entities.
Instead, all the mortgages they hold and whatever “capital” they have should be auctioned off, then both of them just folded up and closed.
“Taxpayer” backing of mortgages always helps increase housing bubbles when they occur. When ONLY private banks/investors are involved with no taxpayer backstop, the binge in buying is staunched before it gets too extensive, and whatever losses have to be absorbed by the private outfits/mortgage holders, not the taxpayers.
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