Deal Professor: Decade After Crisis, No Resolution for Fannie and Freddie


Fast-forward almost nine years, and the unfortunate reality is that the G.S.E.s are still the largest suppliers of mortgages today. In 2016, Fannie and Freddie issued mortgage-backed securities worth $974 billion, up 18 percent from 2015.

And that brings us back to the Blackstone deal, which illustrates Fannie’s mission creep from helping people buy homes to helping people rent them. The guarantee was disclosed with Blackstone’s sale of 25 percent of Invitation Homes in an initial public offering last week. Fannie is making the guarantee on collateral of about 50,000 rented single-family homes that Blackstone bought in foreclosure in the last few years. Never mind that the deal is a big subsidy for Blackstone and Invitation Homes. The downside — the government being liable for at least part $1 billion if there is a default — is real.

Fannie’s take: “This transaction is a great opportunity to continue to serve the growing single-family rental market.” It added that the transaction would provide it with more information on the rental market itself.

That’s an expensive price tag just to learn about a market.

There is no good solution that can satisfy the politics of a national mortgage market. The government is not willing to fully nationalize Fannie and Freddie because it is unwilling to acknowledge or accept the truth that the current mortgage market depends on government support. Private lenders are often unwilling to extend credit to many borrowers for the 30-year fixed-rate terms that have become the standard of American homeownership. Without support, there would be fewer mortgages made, and they would be shorter term and floating-rate, as they are in other countries.

Privatization of the G.S.E.s raises the same problems. Fannie and Freddie could be recapitalized and set free in the private markets with strict capital controls and restrictions, turning them into quasi-utilities, but they would still have the government’s implicit guarantee. A lot of other ideas have emerged for Fannie and Freddie, including making them share more risk with the private sector, which was the subject of a bill introduced in Congress in December. Another proposal is to merge them and have the combined entity extend mortgage credit while selling off its risks.

But none of these solutions are easy, and they all require a hard acknowledgment that the government is committed to supporting the mortgage market.

Fannie’s and Freddie’s only competitor has been the Federal Housing Administration, which underwrote $245 billion in loans in 2016, up from $59.8 billion in 2007. The F.H.A. has been actively competing to take away Fannie Mae and Freddie Mac business through low down-payment lending. That’s hardly a nongovernmental solution.

With the election of Donald J. Trump there is some sentiment in the markets that the government will do something with the G.S.E.s. Indeed, the share price of Fannie hit a high of $5.50 a share shortly after the November election, up from about 20 cents during the financial crisis. The increase is a bet that the government will privatize Fannie Mae and Freddie Mac and allow the public holders to keep their shares. That would benefit hedge fund managers like Bruce R. Berkowitz, a big owner of Fannie Mae preferred stock. Steven T. Mnuchin, the nominee for Treasury secretary, was on the board of Berkowitz’s hedge fund, and the expectation was that he would favor a spinout and recapitalization.

In his Senate confirmation hearings Mr. Mnuchin demurred. Instead, he stated “there never should be recap and release.”

But he added that Fannie and Freddie were among the administration’s top 10 priorities.

So that leaves the companies still in limbo.

If the government really wants to preserve the 30-year mortgage market, it should simply limit these two entities to that loan product, and only that 30-year loan product. Everything else seems not only to preserve the tenuous position of Fannie and Freddie, but also to risk making them just instruments for unrestrained housing policy with lots of unintended consequences and risks.

A simple limitation like this would make sense, but don’t count on it. Given how hard it is for the government to even acknowledge what the problem is, expect the next administration in four to eight years to still be talking about what to do as Fannie and Freddie continue to be the key players in a multitrillion-dollar mortgage market, while still being government-owned. At least until the next crisis or scandal.

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