Fannie and Freddie look to run down clock
3 August to 9 August 2013 | By Philip Scipio
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Despite current efforts to wind down the behemoth government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, they may be around for a long time yet. A repayment of the massive government US$187bn bailout may take the wind out of the sails of reformers – the two have already paid some US$132bn in dividends to US taxpayers – and competing reform efforts in the US Congress may complicate moves to abolish the two giants.
“The political will on both the left and right is towards ending the current system,” said Paul Leonard, senior vice-president of government affairs for the Financial Services Roundtable’s Housing Policy Council.
Leonard represents a group of mortgage originators and insurers that are supporting an approach being developed in the US Senate that would create a Federal Mortgage Insurance Corporation, modelled after the Federal Deposit Insurance Corporation, which would insure eligible mortgages and provide a backstop behind private capital. That plan would wind down Fannie and Freddie within five years.
“We are strongly in favour of reforming the system,” Leonard said. “We think that Fannie and Freddie should be gradually phased out and replaced with a structure that is based on private capital with protections for the taxpayer.”
Private capital is currently being sidelined, with government entities, including Fannie and Freddie, financing nine out of 10 US mortgages. Private financing through RMBS has all but disappeared.
A parallel reform effort going through the US House of Representative would also see the end of the agencies in five years but would not create a government backstop. The proposal would also repeal several components of the Dodd-Frank Act. The difference in approach between the two chambers could doom any effort to restructure the housing finance system.
“The steam will go out of the reform movement the longer they wait and the more Freddie and Fannie return to solid footing”
“There’s still a lot of intellectual groundwork to be done to nail down exactly what we need to do and reach consensus,” said Moody’s chief economist Mark Zandi, who admitted there was no immediate catalyst for change.
Zandi is in favour of winding down the giants. If allowed to continue they embody “too big to fail risk” and the risk is unnecessary given that private financial institutions are willing to step in, he said. Zandi and Leonard believe that private RMBS issuance will pick up when qualified residential mortgage rules under Dodd-Frank are finalised.
“The most important thing is not to mess it up. Not to do something that jeopardises the smooth-running mortgage finance system,” said Zandi.
Slip away
Those anxious to see the GSE’s being wound down, however, fear the opportunity could slip away.
“The steam will go out of the reform movement the longer they wait and the more Freddie and Fannie return to solid footing,” said Anthony Sanders, a professor of finance at George Mason University. He was previously head of asset-backed and mortgage-backed securities research at Deutsche Bank.
Banks have been in two minds about Fannie and Freddie for years, he said. On the one hand, they want to capture the market themselves and generate huge fees. On the other, they like the stability Fannie and Freddie provide, Sanders said.
Unless there is comfort that any new entity can be ring-fenced from Congressional meddling, there is a good chance that a similar system will eventually be recreated, Sanders said. “Since Fannie and Freddie are already in place, why not just redo their charter and reform them?” he asked.
