James Pethokoukis

Politics and policy from inside Washington

Why Fannie and Freddie are sticking around

Feb 11, 2011 16:21 UTC

The Obama White House finally has a kinda-sorta housing plan. But here is the thing: Fannie Mae and Freddie Mac, seized by the U.S. government back in 2008, don’t possess the political clout they used to. But the two mortgage finance giants still have a network with shared interests. That lingering influence is a big reason why they — or possibly similar-looking replacements — will be around for a while longer.

The White House and congressional Republicans agree that housing finance, a big contributor to the recent financial crisis, needs a sweeping overhaul. That includes dramatically reducing or eliminating the role of Fannie and Freddie, which have soaked up more than $150 billion in taxpayer aid since the federal takeover. But it looks like President Barack Obama’s team can’t decide on a single plan and will instead offer a menu of options for reducing government’s role in housing. And while the GOP is adamant it wants to wind down Fannie and Freddie as soon as possible, it doesn’t seem ready to start quite yet.

Rash moves are unwise when U.S. housing remains mired in a deep downturn. But all the Washington waffling isn’t a sign of prudence. A reform roadmap is way overdue. Unfortunately, inaction is tempting when pain is near and benefits distant. Democrats and Republicans are also up against an onslaught from the potential losers if the government ends or sharply reduces its support of the residential mortgage market — currently channeled through Fannie and Freddie.

And there are plenty of those folks. Real estate agents and homebuilders, of course, want housing credit to be as widely available as possible. The very existence of mortgage insurers depends on Fannie and Freddie’s requirements. Big banks are used to offloading mortgages via the securitization market which, though currently in the dumps, was formerly greased by the safety and uniformity of the government backstop. Small banks, meanwhile, worry that big banks would dominate a private-sector mortgage market. And mortgage bond investors are fearful of even a gradual removal of government support.

Overall, the real estate industry gave nearly $70 million to candidates in the most recent congressional election cycle, according to the Center for Responsive Politics. Together with the other constituencies, there’s considerable juice to stymie legislation. Sadly, the biggest hole in financial reform may continue to gape at least until the next Congress takes office in 2013.

COMMENT

“Everyone wants to get to heaven, but no one wants to die”

Funny how when it comes to embracing risk the ones who exalt the private sector seem to find a role for government.

Posted by ARJTurgot2 | Report as abusive

Fannie and Freddie and Barney

Oct 21, 2010 17:02 UTC

IBD‘s great Capital Hill blog makes a good point about F&F and the midterms:

That’s more bad news for Rep. Barney Frank, D-Mass., who’s in the political fight of his life with Republican Sean Bielat. The businessman and Marine reservist has laid into Frank, now chairman of the House Financial Services Committee, for his long support of Fannie and Fannie.

The government-sponsored enterprises were a major cause of the financial crisis. With their implicit — now explicit — taxpayer guarantees, Fannie and Freddie were able to expand and leverage far more than any truly private company could, and they used that heft to plow into subprime loans.

Back at a 2003 hearing, Frank pooh-poohed Republican and regulator concerns about the size and scope of Freddie and Fannie, saying he didn’t want to emphasize “safety and soundness.” Instead, he said, “I want to roll the dice a little bit more in this situation towards subsidized housing.”

COMMENT

Acetracy,

How is it Dems can whine about Republicans blocking Obama’s agneda when they, the GOP are a minority, yet they cannot fathom how the Dems could block any reform to Fran and Fred?

did you ever hear of a super-majority?

Posted by contessa61 | Report as abusive

Fannie and Freddie could need $363 billion in taxpayer funds by 2013

Oct 21, 2010 14:32 UTC

Ugh.

The Federal Housing Finance Agency (FHFA) today released projections of the financial performance of Fannie Mae and Freddie Mac (the Enterprises) including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury. To date, the Enterprises have drawn $148 billion from the Treasury Department under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013.

The FFHA ginned up three different underlying economic forecasts:

ffha1

And then ran the numbers:

ffha2

The future of Fannie and Freddie? None

Aug 19, 2010 13:13 UTC

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.

COMMENT

I’ll gear this review to 2 types of people: current Zune owners who are considering an upgrade, and people trying to decide between a Zune and an iPod. (There are other players worth considering out there, like the Sony Walkman X, but I hope this gives you enough info to make an informed decision of the Zune vs players other than the iPod line as well.)

Are Fannie and Freddie really worth it?

Aug 18, 2010 18:11 UTC

CNBC’s John Carney nails it right on the head:

Defenders of Fannie and Freddie insist that their role in making mortgages cheaper is vital to the market and expanding home-ownership.

But this is nonsense. Fannie and Freddie never made mortgages cheaper — they merely hid the costs. The subsidy was illusory.

Economists estimate that over the course of their lifetimes, Fannie and Freddie probably saved homebuyers $100 billion in mortgage payments. That compares very badly to the $145 billion in bailout funds they’ve already received — and horribly with the $386 billion the Congressional Budget Office says the companies will cost taxpayers over the next decade. Homebuyers got cheaper mortgages but at a very stiff price for taxpayers.

Any sensible person can see that this is a bad deal.

If we really want to make home-mortgages cheaper, we would do far better admitting that we cannot do this for free. The money saved on the mortgage will end up on the tax bill.

Several studies show that the benefit to mortgage rates is quite slight, perhaps as little as 20 basis points.

COMMENT

Carney forgets one important point in his equation – home prices! The private market screwed up the housing market with their greed and dispassionate arrogance and we, the taxpayers have had to make up for their avarice.

Without Freddie and Fannie, though they are going to cost us a tremendous amount of money, home values across this country would probably decline by $2 trillion at the least.

So, Jimmy P, your insistence to quote Carney is a huge and disingenuous mistake that points directly back to the excess of free-market capitalism.

Posted by jim_worth | Report as abusive

Poll: Americans dubious of government forgiving mortgages

Aug 9, 2010 18:32 UTC

Superpollster Scott Rasmussen apparently noticed my recent column:

A new Rasmussen Reports national telephone survey finds that:

1. 58% oppose a proposal to have the federal government forgive a portion of the mortgage debt owned by troubled homeowners.

2. 63% of voters think a government mortgage forgiveness program is unfair to those who have been regularly paying their mortgages …  vs. 23% who disagree and believe such a program is fair.

3. 48% of homeowners think government-ordered mortgage forgiveness for some homeowners would be bad for the economy … 30% say it would be good for the economy, and 15% believe it would have no impact.

4. Nearly half (49%) of Democrats say government-ordered mortgage forgiveness for some homeowners would be good for the economy. Sixty-seven percent (67%) of GOP voters disagree and say the plan would be bad for the economy. Among unaffiliated voters, 33% say good, but 47% say bad.

5. Sixty-eight percent (68%) of the Political Class say a mortgage forgiveness plan would be good for the economy. Fifty-five percent (55%) of Mainstream voters feel otherwise and think it would hurt the economy.

COMMENT

I don’t believe most of those polled were aware of who would suffer if President Obama’s mortgage forgiveness plan would ever become a reality. The derivative default swap fiasco that ripped our economy to pieces was in large part to too how many times mortgages were sold. The only real loser would be the last owner of the mortgages and I don’t think the public really cares if they get burned. Maybe if that Geitner fellow relinquishes some real information regarding who stands to lose, the President will have an easier time selling the concept to everyone and once again embarrass the Senate republicans, again.

Posted by Tim456897 | Report as abusive

Can mortgage relief become a free-lunch stimulus?

Aug 5, 2010 19:18 UTC

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.

COMMENT

I’m afraid you have it all wrong. While developing our farm for our retirement the massive residential building that ensued from Government incentives and wall street thieves, and Black Swan Economic Fools caused us to end up with a development that is now underwater. Also, our home that we have owned for 28 years is now worth less than the mortgage, due to our borrowing a modest amount in order to deal with government policy based problems. Bad decision you say. Poor investment you say. The real estate market will not recover and neither will our economy if we continue to bail out the thieves of wall street who created this problem along with a congress and former administration which aided and abetted the thieves. Main street is where the real economy of the US is based. Steal from main street and give it to the rich, that’s what has been done so far and I guess what you continue to advocate while hiding under the cover of budget deficits created by government and wall street. I worked both in the Marine Corps in Vietnam era and in civil service in their college summer program. My father retired from civil service GS-17. Deep sixing was standard practice when I was in the Military, and the civil service is filled with people who run their own businesses out of their government paid for office. We have a lot of waste, but it is not out here in Main Street. We work for a living. Where is Robin Hood when we need him? Get main street back to work and our taxes will end the deficit.

Posted by onthewaters | Report as abusive

Using Fannie and Freddie to influence the 2010 midterm elections

Dec 28, 2009 14:28 UTC

So the Treasury Department announces unlimited support for Fannie Mae Freddie Mac for the next thee years. I think Wall Street Pit raises a very provocative point on this might all relate to the 2010 election:

In an attempt to limit the damage the economy does to their majority in the 2010 elections, the administration is likely to go all in on mortgage modifications that require principal reduction. They can only take so much skin off of the banks in this effort and the last thing they want is to put the financial system back in another crunch. That leave Fannie and Freddie as the vehicles to bail out homeowners that so far have resisted efforts to “save” them. It makes perfect sense that the Treasury’s announcement of unlimited support would be followed by a big, new homeowner bailout program.

Business Insider also touches on this:

Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.

As does Calculated Risk:

There is a possibility that the Treasury is planning on introducing a principal reduction component to HAMP in January, and this could lead to significantly larger losses for Fannie and Freddie (just speculation on my part). There has been no announcement yet, and even if this is proposed it might only apply to Fannie and Freddie related loans, and not private MBS (the number of Fannie/Freddie loans compared to private MBS varies significantly by servicer).

White House reform plan to make Fannie and Freddie … Fannier and Freddier!

Aug 6, 2009 14:53 UTC

So Team Obama is considering a truly horrible plan: to re-imagine Freddie and Freddie as new entities that are just like the current failed ones, but with government taking over all the toxic stuff . Tell it to me WaPo:

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac  that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said. The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

Me: Well, that is one approach.  Or perhaps  …. we could just break up and replace them with a larger number of smaller private companies — ones with no implied government guarantees. They would be left to thrive or fail or get taken over or whatever.  Then again, as this posts says, no one is going to be buying houses anyways.

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