Fannie Mae: Recap and Release” Not an Option—But Neither is Status Quo - Hedge Fund Alpha (formerly ValueWalk Premium)
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Fannie Mae: Recap and Release” Not an Option—But Neither is Status Quo

By: Amanda Maher

 

Fannie Mae: Recap and Release” Not an Option—But Neither is Status QuoImage courtesy of investorsunite.org

There was more business as usual in Washington, Monday, when a White House official announced the Obama Administration would not be pursuing advocates’ calls for the recapitalization and release of Fannie Mae and Freddie Mac. That morning, Obama advisor Michael Stegman told a group of mortgage bankers that the administration plans to keep the GSEs under government conservatorship.

Conservatorship, though, was never intended to be a permanent solution. As time passes, it’s looking like the only solution—albeit a highly flawed solution.

Spooked by flailing U.S. housing and mortgage markets in 2007 and 2008, and with the growing concern over Fannie Mae and Freddie Mac’s liquidity, investors seemed to welcome the government bailout and accept the plan for temporary conservatorship. The fed’s $187 billion bailout helped to increase lenders’ confidence and stabilize the economy during what appeared to be a housing market freefall. Indeed, the bailout was an important step during a time of real economic uncertainty.

Yet conservatorship wasn’t only supposed to stabilize the housing market. It was also intended to usher in real housing finance reform, reform that would reduce the $250 billion in contingent credit risk currently faced by taxpayers. Reform has been sluggish. The only meaningful action occurred in 2012 when the Department of Treasury made the decision to take nearly all of the profits generated by the companies, an effort to compensate taxpayers for the bailout, says the Obama administration. Despite the U.S. government owning only 80% of Fannie Mae and Freddie Mac, they’ve taken in all of the $239 billion in new revenue generated. Uncle Sam has been fully repaid, and then some.

Investors in Fannie Mae and Freddie Mac are furious and rightly so.

Once described as a “shining example of public-private partnerships,” the public sector has essentially turned its back on investors. The government wants to continue harnessing private capital to advance the social goal of expanding homeownership, yet it now refuses to distribute dividends to shareholders. It’s no wonder that more than 20 investors have filed lawsuits over the Treasury’s profit sweep already. Time to “recap and release” Fannie Mae and Freddie Mac back to the private sector, investors say.

In a blow to the “partnership,” the calls to recap and release continue falling on deaf ears.

“We learned the hard way that the old business model of privatizing gains while socializing doesn’t work,” wrote Antonio Weiss, advisor to Treasury Sec. Jacob Lew, in a Bloomberg Op-Ed Monday. “The Obama administration wants to transition to a better system, one that provides broad access to housing supported by a sound and robust mortgage market, without exposing taxpayers to another rescue.”

In a typical bureaucratic catch-22, the government refuses to budge on releasing Fannie Mae and Freddie Mac from conservatorship without housing finance reform, yet Congressional gridlock has all but ensured that housing finance reform will be impossible under this administration. A recent report by the Federal Reserve Bank of Atlanta echoes this sentiment, in which authors suggest that the farther removed we become from the September 2008 bailout, the perceived urgency for reform seems to recede. Failure to wind down Fannie Mae and Freddie Mac would be a missed opportunity to put U.S. residential mortgage finance on a more stable long-term footing, the report concludes.

There seems to be a middle ground here. The U.S. Treasury, at a minimum, should start building up the companies’ capital reserves and paying dividends to private shareholders. Perhaps it’s too early to recap and release, but if it’s not going to do so, the government needs to make significant progress on housing finance reform. But Washington hates finding middle ground.

With housing finance reform at an impasse, and with Fannie Mae and Freddie Mac investors growing increasingly impatient, there’s growing risk that this public-private partnership that’s been in place since the New Deal era will grind to a halt. If the government continues to hoard all the profit, investors have no chance of making good on their investments. If they can’t make good on their investments, investors will stop buying shares of the companies—again putting taxpayers at risk of a bailout.

Despite the back and forth between the government, the companies’ and their shareholders, there’s one thing that’s for certain: U.S. taxpayers continue to face the greatest risk. Housing finance reform is needed to transfer risk away from taxpayers and the GSEs to the private sector. Yet dismantling Fannie Mae and Freddie Mac isn’t a reasonable option, either. We need these GSEs to continue buying up mortgage from private lenders in order for lenders to offer the lower interest rates that make homeownership a reality for many Americans.

Unfortunately for the American public, Stegman’s remarks on Monday are indicative of the federal government continuing to embrace the status quo despite the dire need for anything but.

Comments (3)

  • Anthony Ellis

    Since when has the government gave a dam for taxpayers, all this bs is like campaigning for the middle class, all propaganda. The taxpayers benefit from having the GSE’s, so they should assume some risk.

    October 22, 2015 at 6:22 pm
  • Paul

    Obama regime should have raised a RED flag of what the government can become in a heart beat, the socialist of America.

    October 22, 2015 at 10:02 pm
    • barrystutner

      Unlike George W. Bush: for whom you voted twice and who seized Fannie Mae and Freddie Mac. Now that is how an MBA CEO operates.

      October 24, 2015 at 12:06 am

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