The debate has opened again on the
fate of Freddie Mac and Fannie Mae (the GSEs).
Ten plus years after the two were
put in federal conservatorship at the start of the housing crisis the issue of
what to do with them and when never seems to come any closer to
resolution. With the expiration of Melvin
Watt’s five-year term as director of the Federal Housing Finance Agency (FHFA) approaching
and a nominee awaiting confirmation, the various sides are dragging out their
arguments and their not insignificant biases.
Solutions however are hazy at best.
Treasury Secretary Steven Mnuchin
told Bloomberg News on Tuesday that the Trump administration wants to see the
conservatorship end but would like Congress to be involved in the resolution. He
added that the executive branch would also be open to making some tweaks on its
own, although he did not specify what those might be.
Mnuchin noted that securing Senate
confirmation of the new FHFA director will be key to administration
efforts. “There are changes we will be
able to make with a new director at the FHFA,” Mnuchin said.
The White House has nominated Mark
Calabria, Vice President Mike Pence’s chief economist, to fill the vacancy. Calabria has indicated positions that are not
particularly friendly to government support of housing, including ending the GSE
conservatorships by placing the two companies in receivership, a process
similar to bankruptcy, and doing away with the mortgage interest deduction.
The GSEs were placed in
conservatorship in 2008 and shored up with $187.5 billion in loans from the Treasury
in return for which the government received senior preferred stock and, through
a 2012 modification of their agreement, the right to strip the companies of all
quarterly profits except for a steadily diminishing capital buffer which ended
late last year. Since then that arrangement was modified slightly to allow the
GSEs to keep some capital to protect them in another downturn. They have now paid Treasury $279 billion in
dividends without reducing their debt.
The eventual fate of the GSEs has
sporadically been debated in Congress and several bills, each addressing a
portion of the issue, have been introduced in the House and several more
comprehensive bills have been presented in the Senate. None have gone far.
One problem has been a debate
between Republicans and Democrats over the role, even the worth, of the GSEs –
a debate which preceded the housing crisis. Republicans have felt the GSEs had
an unfair advantage over banks because the nature of their charter appeared to
be an implicit guarantee from the government to rescue them in the event of a
crisis. This allowed them to borrow at a lower
rate. Democrats have pushed the role of
the GSEs partially as a mechanism to promote affordable housing.
Meanwhile stockholders, largely
hedge funds which bought up GSE stock at fire sale prices, have been in court
contesting the government’s actions stripping GSE profits. They have also urged the Treasury to bypass
lawmakers and allow the companies to rebuild their capital buffers and then
release them from conservatorship with Treasury selling their shares to private
Recently several of the big players
in the housing crisis wrote an op-ed published in The Hill. The group consists of Edward J. DeMarco who
was acting director of FHFA at the time the GSE/Treasury deal was originally
negotiated and later revised; Dave Stevens, former president and CEO of the
Mortgage Bankers Association, Jim Parrott, a nonresident fellow at the Urban
Institute, Douglas Holtz-Eakin, president of the American Action Forum, Lew
Ranieri, CEO of Ranieri Strategies, and Mark Zandi, chief economist for Moody’s
Analytics and a former member of the Obama Administration.
Their article maintains that Wall
Street investors in the GSEs “are pushing a plan to take over the behemoth
financial institutions after a decade in government control.” This would allow
them to reap billions of dollars on their bet that “lawmakers would ultimately
fail to fundamentally change the housing finance system, despite universal
agreement that it was badly needed.”
The group calls the proposal
audacious and appears to blame the GSEs for what befell them, although most
independent studies have found the GSEs to be victims of the housing collapse
rather than responsible for it. The
rescue and conservatorship were badly needed, they say, but was always intended
to be temporary until Congress could replace “a badly flawed model with
something that posed less risk to the housing finance system.” A decade later,
they say, we are still waiting.
The authors say the investor groups’
proposal simply leads back to the pre-crisis model. They do recommend retaining some of the
reforms made during conservatorship, such as limits on what the two companies
can invest in and higher capital levels but would leave “the fundamental structural
flaw that was the system’s ultimate undoing: the dominance of a duopoly that is
too big and too important for the nation ever to let fail.”
This makes sense for the investors,
the writers say, as the GSEs’ market power will bring in more profits, but it
would be up to the taxpayers to bail them out for the very reasons they could
not be allowed to fail last time. The structure
would give them the incentive to take outside risks.
They conclude with the “shame us
once” cliché and say, “Let’s not be distracted by this call to forget the past
but roll up our sleeves and get on with the difficult but important work of
Of course, they offer no suggestions
for what that would be.