U.S. mortgage giants may getter bigger still
As with many giants, it’s hard to cut Fannie Mae and Freddie Mac down to size. The government, which controls the mortgage behemoths, planned to shrink them by 10 percent in 2010. Don’t count on it.
Failure is unthinkable, even though both companies still rely on a $400 billion equity life-line from taxpayers. These are institutions with a combined $1.5 trillion portfolio of mortgage-related investments. Without their supply of financing for home borrowers with good credit, house prices would be lower – and more banks would be in trouble.
Yet in theory, Fannie and Freddie could still be allowed to wither away. When they were put into conservatorship in 2008, a special sort of bankruptcy, the plan was to cut back on their hedge-fund like investment portfolios beginning next year.
In March, one other big support of the housing market will disappear. The Federal Reserve is supposed to sell down, or at least not add to, its $1.25 trillion portfolio of mortgage-related securities built up since January. Private investors are expected to take the Fed’s place. Mortgage-backed bonds still sport triple-A ratings and offer a higher yield than government debt.
But it’s a big hole to fill. And the last thing any politicians want in an election year is for mortgage rates to rise, as they will if private demand falls short. So the government is not going to be in a hurry to let Fannie and Freddie add to the pressure on the weak housing market. They won’t start winding down their portfolios until house prices are much firmer. On the contrary, they will stand ready to act as purchaser of last resort.
Of course, in the long term it’s hard to see why government should be in the business of using tax receipts to prop up housing prices and make good on losses from mortgage defaults. That distorts everything about the housing business and adds to the state’s fiscal burden. But barring a government financing crisis, the long term wind-down for Fannie and Freddie isn’t going to start in 2010.