Freddie and Fannie got a bad rap
Wayne OlsonFannie Mae and Freddie Mac, have repaid the U.S. Treasury (and, therefore, taxpayers) $14.5 billion more in dividends than they received from the Treasury in draws. Together known as the government-sponsored enterprises (GSEs), Fannie Mac and Freddie Mac have, subsequent to the commencement of conservatorship on September 6, 2008, drawn a combined total of $188.4 billion from Treasury, but have now paid dividends of $202.9 billion to Treasury. Governmental accounting looks at inflows and outflows of cash and, on this basis, taxpayers’ “net investment” in the GSEs has been more than repaid.
It would seem to be time to celebrate. After all, America survived a tumultuous period in 2008 that could potentially have led to a major depression, but, with swift and targeted government intervention, mortgages remained available at a reasonable cost to homeowners, the 30-year fixed rate mortgage with an option to repay early remains widely available, and housing prices have remained relatively stable and market conditions have even begun to improve in many places. The GSE’s current mortgage securitization systems are functioning well. Best of all, the GSEs repaid taxpayers in less than six years!
1 Points MentionedThis success occurred because the GSEs were reformed in 2008-2009 based on a “public utility” model supported by effective regulation by the Federal Housing Finance Agency (FHFA). As is now well known, the GSEs did not “cause” the financial crisis, but did face significant challenges that needed to be cleaned up. The GSEs got their act together and have continued to support the U.S. housing and mortgage markets while repaying taxpayers.
The U.S. Congress is now considering bills to phase out and then eliminate the role of the GSEs in U.S. mortgage markets. The Senate bill that reportedly has the best chance of passage is sponsored by Senators Johnson (D-SD) and Crapo (R-ID) and would wind down the GSEs over 10 years and replace them with a government owned Federal Mortgage Insurance Corporation (FMIC) that would provide a common securitization platform and catastrophic mortgage insurance for qualified mortgage-backed securities.
About $300 million has already been spent on creating the “common securitization platform” and much more investment in operational infrastructure would likely be needed to get the FMIC up and running. From an economic standpoint, creating a new securitization system from scratch seems both unnecessary and wasteful. Given the numerous technical and operational challenges, creating the FMIC could become a costly government boondoggle.
Legislative action by a “normal” legislature usually results in an outcome that meets a “no losers” test—the final legislative outcome would be something that all of the major participants can at least live with. In this instance, however, the interests of GSE investors have not been considered, with the legislative branch instead leaving the question of whether there has been a taking of investors’ property without just compensation to the courts to decide.
WAYNE P. OLSON is a former Brunswick resident and an expert on public utility regulation.