COMING: Creating the new company is one of a series of objectives on an annual corporate scorecard, also released Monday by the FHFA, that is used to evaluate Fannie and Freddie's performance and determine the pay of top officers at both companies.
it is time!! WSJ: Fannie, Freddie to Create Joint Firm
March 4, 2013, 5:33 p.m. ET
By NICK TIMIRAOS CONNECT
The regulator overseeing Fannie Mae FNMA +3.45% and Freddie Mac FMCC +4.59% announced Monday one of the most concrete efforts to date for building a new infrastructure that could ultimately replace the government-controlled mortgage companies.
Edward DeMarco, acting director of the Federal Housing Finance Agency, said the agency would begin forming a company that would consolidate some of the "back-office" functions currently replicated individually by each firm. The company would have its own chief executive and board and for now would be jointly owned by Fannie and Freddie, Mr. DeMarco said in a speech Monday before the National Association of Business Economics in Washington, D.C.
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Edward DeMarco heads the FHFA
Fannie and Freddie have operated independently for decades in competition with each other, but last year the FHFA began working with them to create a single platform in which home loans could be packaged into securities.
The two mortgage giants collapsed as the housing sector deteriorated five years ago, and their rescues have cost taxpayers $131 billion so far. They were taken over by the U.S. Treasury in 2008, and the FHFA was tasked with conserving the firms' assets until Congress and the White House decided what to do with them.
Until now, few steps have been taken toward any overhaul. Fannie and Freddie, together with federal agencies, are responsible today for backing nearly nine of 10 new mortgages, with taxpayers on the hook if those loans default. Previously
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The new company could eventually be privatized or folded into the government; that would be determined by Congress and the White House when they begin the process of any overhaul of the $10 trillion mortgage market.
Before those decisions are made, the new company would build a securitization infrastructure to serve whatever replaces Fannie and Freddie.
"What we are trying to do…is to ease the transition from where we are today to wherever lawmakers decide the country ought to ultimately go," Mr. DeMarco said in a briefing with reporters.
He said the platform for issuing mortgage-backed securities would allow for much needed operational upgrades to the back-office infrastructure at both firms. It would also aim to merge certain functions duplicated by the two firms. "Right now, this investment takes place twice. We're trying to just do this once," Mr. DeMarco said.
The initiative comes as a stabilizing housing market has boosted the fortunes of the mortgage companies. Freddie Mac last week reported an $11 billion profit for 2012, its largest ever and its first in six years. Fannie Mae has until mid-March to file its annual report.
In recent months, some industry executives have voiced concerns that the new mortgage-bond infrastructure might allow Fannie and Freddie to extend their dominance of the mortgage market. The latest FHFA move could tamp down those worries.
Mr. DeMarco said the new entity would have a separate physical location from Fannie and Freddie, in addition to its own management and staff. It is unlikely the entities would actually begin the process of issuing securities through the new company this year, he said.
Merging certain functions would also "signal to the market that the status quo since 2008 for the [companies] is changing" and that it would "prepare the groundwork for the next phase of housing finance," said Clifford Rossi, a former Freddie official who is now a finance professor at the University of Maryland.
Creating the new company is one of a series of objectives on an annual corporate scorecard, also released Monday by the FHFA, that is used to evaluate Fannie and Freddie's performance and determine the pay of top officers at both companies.
As part of those annual priorities, the FHFA said it would direct the companies to advance previously announced plans to sell slices of mortgage-backed securities that aren't covered by a government guarantee. It said each company should attempt to sell at least $30 billion of different mortgage-backed products that would put private investors in a first-loss position on those loans.
The FHFA also directed the firms to reduce their backing of loans for rental apartments by 10% from last year's levels and to sell a portion of the whole loans or other illiquid securities that sit on the firms balance sheets. The companies are already required to shrink those portfolios by 15% annually, but they have largely met those targets simply through the normal maturity of various mortgage investments.
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