Exactly two years ago I wrote a column about Fannie Mae and Freddie Mac (AKA The Agencies, or GSEs) and the efforts to dismantle them for political reasons. Fortunately for those who own homes, those who may want to buy homes, and those who sell homes for others, nothing ever came of those efforts – so far.
The problem, as I reported then, is that the agencies are still by far the most effective and efficient organizations for raising money for mortgage lending in the world. In addition to that, they also turn billions of dollars in profit annually over to the government, and have far surpassed giving back the “investment” the government made in the agencies when they took them over in 2008.
The plan in 2014 was to simply wind down the agencies in order to let the free market take over the responsibility for raising money and making loans, and remove the American taxpayer from having to bail out organizations that get into financial trouble in the event of a crisis.
Ha ha! Just kidding. Of course we would bail out companies that make bad loans. Why stop now?
Anyway, Marketwatch reported this morning that there is a new proposal, and it could actually make a lot of sense. (It was not prepared by politicians. Maybe that’s why.)
A paper titled “A More Promising Road to GSE Reform” co-written by several leading industry veterans proposed that the agencies be consolidated into a single entity wholly owned by the U.S. Government. The new entity would purchase loans and fund their activities as they do now, by selling securities (bonds) secured by the mortgages.
While today’s explicit guarantee by the government to investors in mortgage-backed securities would be replaced by a, well, explicit guarantee by the government, the writers propose that each loan include fees that would build reserves to cover defaults in the event of another collapse. (Those fees are charged on loans now, but the government just takes them.)
Investors in the securities would accept some degree of risk (this is the part that’s different from today) but the government would backstop catastrophic losses in the event of a collapse.
There are those in Congress who have been pushing all along for the agencies to be dismantled or sold, because they want the government out of the business. But all of their proposals so far amount to either throwing away assets worth trillions of dollars or selling those assets to their top contributors their friends private investors for pennies on the dollar. Sorry, that one took a while for me to get the wording right.
According to Marketwatch, “It provides political cover for those who want to reduce the government’s footprint, but it also ensures credit remains available and it has an affordable housing component”
The new corporation would also be required to lend to small borrowers and underserved communities, markets that the private sector does not find interesting, but which are necessary for a healthy housing market.
Realtors, homeowners and home buyers should be thrilled about this proposal. The chances of passage in an election year are well, zero. But the new Congress might have something very interesting to consider in 2017.
You can read the article in Marketwatch.
To download a pdf version of the paper click here.