Last week marked the fourth anniversary of the federal government’s takeover of the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. And while the Wall Street and auto industry bailouts get the most attention, it’s the government’s backstopping of these once quasi-governmental agencies that has cost taxpayers most so far — roughly $142 billion to date.
And though the housing market appears to have found its footing in recent months, and Fannie and Freddie have recently returned to profitability, the future of these institutions –which backstop nine out out of every ten new mortgages in America – remain as uncertain as they were the day the federal government took them over.
The most recent change to the federal government’s stance on Fannie and Freddie came on August 19, when the Treasury Department announced that instead of paying 10% dividends for their government assistance, the two agencies would simply send all their profits to the feds. In addition, the Treasury is now requiring that the GSEs reduce their investment portfolios by an annual rate of 15%, up from a previously stipulated 10%. These reforms will shrink the GSE’s balance sheets at a faster pace and do away with the absurdity of the Fannie and Freddie borrowing from the Treasury to pay a dividend during quarters when profits aren’t large enough to cover the payment. But while this may mean that the total cost of the bailout to taxpayers is reduced, it belies the fact that the federal government — through its conservatorship of the GSEs — will for the foreseeable future remain the largest single player in the housing finance sector. As Douglas Noland, senior portfolio manager at Federated Investors wrote following the changes:
“Truth be told, Fannie, Freddie, and the American taxpayer and economy will remain highly exposed to mortgage Credit risks for many years to come. While GSE mortgage holdings (and balance sheets) have been somewhat reduced, exposure to mortgages they’ve insured remains at near-record levels.”
In other words, while Fannie and Freddie have made some progress unloading actual mortgages they hold on their books, the two GSEs have not pulled back in their role as a primary source of liquidity for the nation’s housing finance system. Most of what Fannie and Freddie does involves purchasing loans made by private firms, turning these loans into mortgage-backed securities, and selling these on to private investors while guaranteeing timely payments on these bonds. And many in the industry are skeptical that private capital will return to take over this role from Fannie and Freddie without seriously impeding Americans ability to finance their home purchases.
Republicans in Congress, the Romney campaign, and the Obama Administration have all voiced support for reducing Fannie and Freddie’s footprint on the housing finance system. Republicans have argued for a completely private system for housing finance, while in February of last year, the Obama Administration outlined three proposals for the future of the housing market, which included various levels of government involvement. But these proposals were vague, and included few details as to how to actually foster more private involvement in the mortgage market. Nor has the Obama administration actually stated its preference for the future of Fannie Mae and Freddie Mac.
There has been some effort to get the private sector to take up some of burden of providing liquidity. On August 31, Ed DeMarco, acting director of the Federal Housing Finance Authority (the agency that oversees Fannie Mae and Freddie Mac) announced that the GSEs would raise the rates they charge to guarantee mortgages, in the hope that it would encourage private firms to move in on the GSE’s business. But it is unclear whether there are any firms that are going to pick up this slack, or whether such a move will simply result in new homebuyers paying higher rates.
It’s certainly good news that home prices have stabilized in America, and that Fannie Mae and Freddie Macs quarterly profit reports have reflected that fact. It looks like the American taxpayer might start recouping some of its investment in the housing giants. But neither the President nor Republicans have outlined a credible plan for getting the federal government out of the housing market in any meaningful way, and ultimately that means that taxpayers will continue to be on the hook for what amounts to $5 trillion in mortgage assets.