GSEs (Fannie/Freddie),FHA&HUD

Longer Leash for Fannie and Freddie...Announced Christmas Eve

Posted on Thursday, December 31, 2009

My best guess is there were not one but several reasons behind the recent move to write Fannie and Freddie a blank check. One reason was clearly to send a message to MBS investors that they can hold onto what they own without worry and keep on buying. This will obviously keep relatively cheap mortgage available to Americans who want to buy homes which in turn will keep home prices from beginning a new fall and avoid further foreclosures and hopefully help to absorb some of the unprecedented inventory we will not doubt see during 2010 as a result of the current default and foreclosure pipeline and shadow inventory. Another reason though is probably to allow the GSEs more flexibility, control and discretion in modifying existing mortgages. At the moment, there are still obstacles to this, not the least of which are servicers and banks who do not want to take further losses by way of principal write downs and the like.
While most of you will agree that the big picture need here is to balance further damage which may result by pulling out GSE support too quickly against creating more problems being caused by further GSE intervention and making it even more difficult to pull in the monsters, the disagreements arise over whether or not the proper balance is being maintained. This new move would be far more palatable if the “yin” of giving the GSE more leash came with a “yang” of tighter or clearer future pull back goals.
Last year the decision was made to require the GSEs to begin shrinking their mortgage and MBS portfolios, a total of about $1.5 trillion. Some suspect the reasons behind the pull back on this sound requirement will eventually be more clearly to replace the Fed’s purchasing of MBS, a $1.25 trillion commitment that most will agree has kept rates lows and some will argue has put us at greater risk of inflation. It’s already cost the Treasury about $112 billion to keep Fannie and Freddie and the half of our nations’ $12 trillion in home loans they own or insure afloat.
Since the 30s for Fannie and the 80s for Freddie, these entities have seen different incarnations. The roles of guaranteeing payments for investors has morphed into efforts to increase profits by buying loans and MBS for their own portfolios
This is nothing more than the culmination of decade long abuse and oversight neglect. Highly political. Accounting improprieties. Began buying risky loans in early 1990s to meet affordable housing requirements set by Congress and HUD (in and of itself an entire debate over whether or not this even impact the approximate 60 to 64% homeownership rate we’ve seen and whether or not homeownership is a right and should be as revered as we seem to have made it as a culture) Talk since 2003. Some of the worst mistakes were made with risky purchases between 2005 and 2007, around the same time that flat out lies about the nature of these investments and other improprieties came to light. Investors had relied on AAA rating that simply were not true. These lies were one of the main reasons so many investors the GSEs are being given power to help keep engaged now fled the MBS market in the first place. We have a word for this in the private sector and I’m not quite sure why it’s been treated differently with Fannie and Freddie. By 2007 the GSEs were required to have at least 55% of their loans be made to lower income and minority homeowners, clearly a political goal and one of the several reason the GSEs have been so political, another major problem. Even if you could take the GSEs out of Washington will you ever be able to take Washington out of the GSEs? Examples and the implications of good old fashioned political cronyism at the GSEs including support from the politicians and contributions from the GSEs in return – is also fodder for another article.
Last year Henry Paulson delivered a speech about our beloved GSE that I found directly on. In summary he admonished that three goals are necessary; clarify the now implicit government backing by either making it explicit or making it go away altogether, separate the public purpose of supporting affordable housing from the private purpose of generating profit, and implement better oversight. I would add to that wish list another obvious one, reduce their size.
By end of last year Fannie and Freddie owned or insured over 10 million subprime and Alt A loans and MBS (of an estimated 26 million and another 7.7 million in the pools supporting MBS) totaling around $1.6 trillion now defaulting at record rates. And the worst is yet to come.
I am a big picture supporter of our GSEs. At times like these it is important to have an existing infrastructure to implement needed interventions like certain loan modifications and interest rate interventions. On the other hand, I am skeptical of Washington’s ability to honor the principals upon which our country was founded in the first place, private enterprise, capitalism and those good things. The GSEs need to be split so that their private purpose is run privately and their public purpose publically. Instead what we have is are a couple of two headed monsters.

And if the powers that be want to avoid the further impression of political shell games, they can start by not making announcements like this on Christmas Eve!


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