I’ve seen countless articles like this one by Whalen over the past 25 years (since the formation of FM Watch, when Fannie and Freddie’s opponents and critics began publishing pieces using out-of-context facts and misinformation to “explain” why the companies either were much riskier than commonly believed, or provided little real benefit to homebuyers).
In the article above, almost all of Whalen’s “pretty specific claims” flow from dubious statements he makes at the outset. Without supporting evidence, he asserts: “Since 2008, legal and regulatory changes make it impossible to pretend that the GSEs are sovereign credits once they leave government control. If a once and future President Donald Trump were to move to release the GSEs from conservatorship, Moody’s and the other rating agencies would be forced to downgrade both credits. Think “A+” including the Treasury credit line….The second issue preventing a release of the GSEs is operational, but also goes to value. Both GSEs have deteriorated operationally over the past 15 years, losing any operational efficiency in favor of a culture that is more like the U.S. Postal Service with an angry progressive overlay. Under the Biden Administration, Fannie Mae and Freddie Mac lost most of the key personnel with actual mortgage market experience that enabled them to be competitive.”
The gratuitous comment about operational efficiency disqualifies Whalen as a reliable analyst of the companies. There have been no reports of operational issues at either Fannie or Freddie from any objective source, and the erosion of their competitiveness is entirely due to their guaranty fee pricing, which has been artificially and unnecessarily elevated by grossly excessive capital requirements. And that links to Whalen’s first misstatement, about credit. He asserts that were the companies to be released from conservatorship the ratings agencies would reduce their credit ratings to A+ “including the Treasury credit line,” and that this “is when the trouble would begin.” The facts, however, suggest otherwise.
To begin with, Whalen probably does not know that Standard and Poor’s gave Fannie a “risk-to-the-government” rating of AA- back in 1997, when most of the company’s earnings came from its on-balance sheet mortgage portfolio business, and it held 3.72 percent capital against its total assets, NOT including outstanding mortgage-backed securities, which were held off-balance-sheet (and against which it was required to hold minimum capital of 45 basis points). Today, Fannie’s MBS are all on its balance sheet, its much riskier on-balance sheet mortgage portfolio makes up just 1.3% of its total mortgages financed (on-balance-sheet mortgages accounted for 35.4% of Fannie’s mortgages financed in 1997), and its total stockholder’s equity at December 31, 2023 was $77.7 billion, or 1.80% of its total assets, virtually all of which (95%) were guarantees of mortgage-backed securities, which in 1997 had minimum required capital of 45 basis points, or one-quarter of the capital it holds today. So why, Mr. Whalen, would Fannie be given a worse “risk-to-the-government” rating today than 27 years ago? Because you would like that to be the case?
Then there is the “inconvenient fact” that both Fannie and Freddie have been able to pass their last two Dodd-Frank stress tests–assuming a repeat of the home price declines that followed the Great Financial Crisis–with no initial capital at all. Most responsible proposals for releasing Fannie and Freddie from conservatorship admit that some form of formal support for the companies (as is the case now, with the Senior Preferred Stock Purchase Agreement) would remain in place, but be paid for. And the current SPSPA requires that its commitment fee be “mutually agreed by Purchaser [Treasury] and Seller [Fannie or Freddie], subject to their reasonable discretion and in consultation with the Chairman of the Federal Reserve.” As long as the companies’ Dodd-Frank stress test results remain anywhere close to where they currently are, the chance of them ever having to rely upon Treasury support are minuscule, and a “reasonable” commitment fee would reflect that. Again, that’s not the result Mr. Whalen desires or predicts, but it’s what should happen based on the facts.
