Reconsidering Death Sentence For Fannie and Freddie

There may be life in those old GSE bones yet.  At least that is one conclusion that can be drawn from an article in Bloomberg on Tuesday.  Writers Clea Benson and Cheyenne Hopkins write about some current Washington discussions about the future of Fannie Mae in a piece titled “Fannie Mae Survival is Back on the Table in Washington.”  The Bloomberg piece is an interesting complement to an analysis from Bank of America/Merrill Lynch which MND covered in August.  </p

(Read More: Analysts Call for Salvaging GSEs, Advocate Small Tweaks not Massive Reform)</p

At that time Merrill Lynch Rates Strategists Ralph Axel and Priya Misra discussed saving both Fannie Mae and Freddie Mac, pointing to the GSEs’ record financial performance in the previous few quarters, the substantial return the two had already made on the Treasury’s investment in them, that they had needed no taxpayer support for over a year, and that during their conservatorships they have provided the bulk of the country’s mortgage liquidity and completed several million foreclosure interventions.  These results provide two key takeaways, the Axel and Misra said; 1) the GSEs function well as government-run entities, and 2) the infrastructure of mortgage finance is not in need of major reform.</p

ThernBloomberg reporters find that the Merrill Lynch is not alone in its opinion atrnleast as regards the larger of the two corporations but at the same time fewrnseem interested in absolute salvation.   The consensus in Washington, they say, isrnstill strongly tilted toward dismantling the mortgage companies but it is “weakeningrnamid opposition from hedge funds, regional banks and others who could benefitrnif the companies survive in some form.”  Their article, however, is more concerned about therntiming involved in elimination of the GSEs than in whether they actuallyrnsurvive.</p

Thernofficial Obama Administration position is that Freddie and Fannie should bernwound down and replaced by a new housing system but some Democrats, the Bloomberg writers say, are leery of a homernfinancing system that would rely too heavily on private money.  Both Senate Majority Leader Harry Reid (D-NV)rnand Banking Committee member Robert Menendez (D-NJ) have expressed some degreernof support for keeping the GSEs.  </p

Morernstrongly in favor are a few hedge funds which have accumulated large holdingsrnof the GSEs’ preferred stock and, the Bloomberg article says, have spent monthsrnlobbying for their recapitalization.  Onernof these hedge funds, Perry Capital, as well as FairholmernFunds have sued the U.S., charging that Treasury is “expropriating the value”rnof its investors’ preferred shares through recent changes in Treasury’s ownrnagreement with the GSEs.  </p

While the hedge funds didn’t get far inrntheir early meetings with senators, the authors say that the atmosphere isrnwarming to the idea that an entirely new system could risk instability in thernmarket.   The primary piece of activernlegislation pushing a totally clean start is the so-called PATH bill sponsoredrnby Jeb Hensarling (R-TX) Chair of the House Financial Services Committee which wouldrneliminate virtually all government involvement in housing finance except for arnscaled-down role for the FHA.  The PATHrnbill has been voted out of committee but Benson and Hopkins say it is unlikelyrnto receive a full House vote this year. </p

(Read More: MBA’s Stevens and Others Raise Concerns over PATH Proposal)</p

(Read More: Financial Services Committee Responds to PATH Criticism)</p

More likely to be the legislativernvehicle is a bill sponsored by Tim Johnson (D-SD) and Mike Crapo (R-ID) whichrnincorporates parts of the earlier Corker-Warner bill which would wind downrnFannie and Freddie over five years.  Ifrnwould keep the government involved in finance through a catastrophic guaranteernthat would come into play only after private funds had absorbed a certain levelrnof losses.  </p

According to the Bloomberg article, regionalrnand community banks are concerned that they will be shut out of a new systemrnwithout entities like Freddie and Fannie available to purchase and securitizernthe loans they write.  At the same timernlarge banks and others appear most worried about a too precipitous wind down.  Some say it is unclear whether private capitalrnwill be willing to take a first-loss position should the GSE guarantees gornaway.  Others say the five-year window isrntoo aggressive.  </p

One very strong voice for a continuedrnFreddie/Fannie presence represented in the article is James Millstein, CEO ofrnMillstein and Company and author of a recapitalization plan for thernenterprises, but even he seems most concerned with timing.   Herntold the National Press Club this month that, “Asrnmuch as it’s problematic in this town for people to stomach the idea that thesernentities are going to survive, we have to reform and recapitalize and privatizernthem to ensure stable credit formation during this transition to a newrngovernment guarantee </p

Bob Corker (R-TN), sponsor ofrnthe Corker-Warner bill said that the survival of the essential functions of the GSEsrndoes not mean that the companies themselves must survive.  His bill, he said, “outlines a very clear picture for a future state of housingrnfinance that does not rely on the duopolies of Fannie and Freddie, but itrnsmartly leverages the existing technology and infrastructure already built inrnorder to help us get there.”</p

(Read More: MBA and FHFA Carefully Applaud Corker/Warner GSE Bill) </p

Benson and Hopkins say that Republicans,rnwho have been most vocal about the need to eliminate the two companies, haven’trnbudged.  Many of them were fighting tornreduce the GSE housing footprint long before the financial crisis.  </p

Thernauthors also say that Republicans and Democrats in general have shown littlernenthusiasm for a solution that would appear to reward investors more thanrntaxpayers. Corker and his bill’s cosponsor, Mark Warner (D-VA) say it would bernpossible to preserve some parts or functions of the mortgage companies withoutrnbenefitting shareholders.

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.