Plan to Privatize Fannie Mae and Freddie Mac

Casey Fleming

I’ve been writing for several years that lawmakers have been making a lot of noise – but no progress – on plans to privatize Fannie Mae and Freddie Mac.

Will Congress Privatize Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are “The Agencies”

If you recall, the Bush administration forced the government takeover of the agencies in 2008, saying that their loan loss reserves were too low to sustain the organizations, which at the time were publicly-traded companies.

The problem was that the government was implicitly guaranteeing the return of principal on mortgage-backed securities issued by the agencies, and the administration claimed that they would have to pay out billions in losses.  It never happened, so we’ll never know.

Where the money is going

Since 2008 the government has owned more than 70% of the agencies, but has kept 100% of the profit in order to pay back the taxpayers for the initial investment.

I haven’t seen my refund – have you?

Anyway, fast forward a few years.  By 2010 or so the agencies were profitable again, and within a few years had paid back all of the initial investment, and then some.  Why did we not privatize Fannie Mae and Freddie Mac then?

Congress gets too much mad money to privatize Fannie Mae and Freddie Mac
Congress won’t let go of this easily

Well, the agencies have been wildly profitable since then, and have been throwing off billions of dollars in net profit every quarter which goes to – the U.S. Treasury.  This is money that isn’t earmarked, and doesn’t feel like a tax to those who pay it, so Congress can pretty much do as they wish with it.  $100 billion a year in mad money.

Political capital is good

But lawmakers have made lots of noise about privatizing the agencies because it’s terrific political capital – let’s privatize the agencies, make government smaller, and build the private sector.  There have been many proposals, but none compelling enough for Congress to give up its mad money.  So nothing has actually been done.

Today the MBA (Mortgage Bankers Association, the industry’s largest trade group) proposed a new plan to privatize the agencies.  The plan would require Congress to re-write the agencies’ charters and to establish an insurance fund (presumably paid for by fees on mortgages purchased by the agencies.)  The insurance fund would be used to guarantee the capital investment of purchasers of the securities issued by the agencies.

Notably the proposal includes provisions that other chartered companies may enter the market and compete with Fannie and Freddie with the same access to the government-sponsored insurance fund.

Are taxpayers still on the hook?

The government would still have a hand in the mortgage business, however, as the FHFA (Federal Housing Finance Agency) would create a government-owned platform for issuing bonds to back the mortgages.  The government would back the securities, guaranteeing their repayment.

The proposed system would be designed to level the playing field in the mortgage industry, as under the plan Congress would require the new entities and any competitors to provide fair access to all mortgage companies, regardless of size, and prohibit price discrimination.

Criticism of the plan generally centered around the issue of continuing the current system of privatizing profit but socializing loss, meaning that investors gain if the market goes well, and taxpayers pick up the loss if it doesn’t.

But watch the money disappear

The other question that hasn’t been addressed by any of the proposals put forth yet is “What do the taxpayers get for their investment?”  Profits from the initial taxpayer outlay are now going into the general fund and being spent by Congress as they see fit.  What happens if the agencies are privatized?  Combined they are worth hundreds of billions of dollars, if not trillions.

Real estate scammer
Wanna buy a wholesale mortgage agency?

When Congress finally gets the political will to privatize Fannie Mae and Freddie Mac, who will set the price?  Who will choose the buyer?  How much will the buyer have to pay?  I don’t wish to be cynical, but it seems to me that someone, somewhere, will become very wealthy (or much wealthier) when this deal finally happens.

Stay tuned.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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