A New Model for Recapitalization and Risk Sharing.
There are several arguments raging in the financial and investor press, the courts and in Congress that are never likely to find any comfortable level of full agreement. Did the GSEs need a bailout, at all? Did the government act to save FnF, or just the big banks? Do shareholders get all the profits while government shoulders all the risks in times of crisis? Were Fannie& Freddie really impaired by social engineering mandates for affordable housing?
Now we fast forward to another, new controversy to add to all the dissent: if momentum has turned towards a "privatization" approach, exactly what form will that take? Will the GSEs simply get restored to their prior role as monopolies in their corner of the mortgage finance business? Will the GSEs get shrunk down in some shared CSP environment to moderate risk? How much reacp $$$ is needed for the GSEs to resume whatever form of privatization gets adopted? There are HUGE variables in play depending on how these questions get answered. And then there is the 800# gorilla of capital running out in December risking further UST draws or liquidation and a huge, new round of litigation and claims for damages.
So why can't a simpler, risk-sharing strategy be formulated that removes the hard edge from the last 8 years of discord? It actually seems simple to me. All sides benefit from healthy GSEs functioning in a healthy housing market. So why can't all sides share in the risk side to guard against future and costly bailouts?
1. Form a risk pool on a 1/3 basis where default risk is equally shared by mortgage originators, the GSEs and the UST. Why do Fannie & Freddie have to shoulder all the risk? Government can keep its over-payments to form the basis for its reserves. Banks can set up reserves starting with new loans originated for the next so-many years, understanding that loans into mid-maturity rarely carry a default risk. Then Fannie and Freddie can recapitalize based on expected income and a return to preferred stock issuance without dilution.
2. Transfer affordable housing initiatives to Ginnie Mae where government-mandated social engineering goals become the government's responsibility. Ditto with the DTS mandates imposed under HERA.
3. All remaining aspects to conservatorship or the SPSPAs are cancelled and nullified.
4. Plaintiffs must then decide whether to go forward or continue to bear huge legal costs to continue for damages. Most will cash out and celebrate.
This is a simple approach. I like simple ways to resolve problems.
JMHO.
AI
