The future of Fannie and Freddie? None
Bond guru Bill Gross warned on Tuesday that without U.S. government guarantees, only mortgage bonds backed by super-safe loans, would interest him. He frets too much. The funeral of Fannie Mae and Freddie Mac may be coming, but housing support from D.C. will live on. The key question is how much.
The Gross plan would see the two mortgage giants evolve into a fully nationalized, mega-securitization engine. That, along with his suggestion for a massive home loan refinancing plan, could mean an even bigger role for Washington in U.S. housing.
But President Barack Obama’s administration has little appetite for that kind of approach. As it is, an annual $250 billion in government subsidies, according to the Congressional Budget Office, gives a poor return on investment. In a normalized housing environment, mortgage interest rates might be only 0.2 percentage points higher without it, according to studies from Ohio State University and a former Freddie Mac economist. And international comparisons hint that home ownership rates might not owe much to the government’s role, either.
Of course, politics means Washington won’t completely leave the stage. Yet even a middle-course would result in a radically restructured system.
Here’s what the Obama plan might well look like:
1) The feds explicitly backstop mortgage-backed securities issued by government-blessed entities who – in exchange – pay Uncle Sam an insurance fee (counted by budget scorekeepers as revenue.)
2) Fannie and Freddie – whom Rep. Barney Frank says should be “abolished” – are wound down.
3) Under a “Let a thousand flowers bloom” approach, private companies, nonprofits and even cooperatives get government charters to securitize low-risk mortgages for middle-class homes.
4) Mildly more racy loans for McMansions are handled by private issuers, but sans government guarantee.
Any such plan would need GOP support. This outline has the advantage of eventually eliminating Fannie and Freddie — directly blamed by many Republicans for the housing crisis — as well as narrowing and decentralizing the government’s participation in mortgage finance.
Then again, limbo could persist until 2013. With home ownership a political hot button, the matter could become a 2012 election battleground. And both parties would love to have a big issue at play that affects the financial sector to help raise campaign cash. Still, eventually change will come. But Gross shouldn’t worry: there will still be plenty of guaranteed mortgage-backed securities for him and other investors to buy.