What to do about Fannie & Freddie? How the Trump administration could change the mortgage industry

by James F. McClister

The public bailout

The capital buffer is expected to hit zero on Jan. 1, 2018, opening Fannie and Freddie up to the possibility of a future public bailout. That is one of the biggest arguments for re-privatizing the institutions.

“If they are private entities, there is no risk to the taxpayer,” says Spencer Cowan of the Woodstock Institute. “There is no potential for the public sector having to bail them out if they do not manage their portfolio properly.”

Based on Aug. 2016 FHFA-run stress tests for both Fannie and Freddie (a regular practice mandated in the Dodd-Frank Act), should they remain under conservatorship, the threat of a future public bailout remains very real.

The test found that in a “severely adverse scenario” – i.e., GDP declines 6.25 percent, unemployment skyrockets to 10 percent, and inflation hits 1.9 percent – the GSEs combined could require a public bailout of as much as $125.8 billion.

The longer we wait, the harder it gets

Threat of a bailout is certainly the most obvious argument for getting Fannie and Freddie out of conservatorship, but as Watt explained early last year, it is not the only argument.

“A less discussed, but related, challenge posed by a continuing conservatorship is Fannie Mae and Freddie Mac’s insulation from normal market forces that would otherwise inform their operations and business practices,” he said.

By removing Fannie and Freddie from the tides of the market, Watt argues that the government has effectively charged the FHFA with maintaining the GSEs’ market discipline and ensuring they are both appropriately competitive.

He added, “The longer the Enterprises remain in conservatorship, the greater and more complicated this responsibility becomes.”

That feeds into the overarching problem of having to totally manage the two massive institutions in protracted conservatorship. According to Watt, the task is doubly difficult because of how uncertain Fannie and Freddie’s futures are.

“Experience demonstrates that it is difficult to manage the Enterprises in the present without establishing some kind of plans for the future,” he said. “Without looking somewhat down the road, FHFA and the Enterprises would both lose their momentum and jeopardize day-to-day success.”

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  • Thomas Sofia says:

    I’ve heard enough. Just put it back the. Way it was. When something bad. Happens the. Uncle Sam. Will help. .every other 2008 bailout was. Returned. To. Businesses as usual.. So be it for FANMA

  • Bill Maloni says:

    I have worked on/written about these matters in the Congress, at federal regulatory agencies, and for more than 20 years as Fannie’s chief lobbyist, before retiring in 2004.

    For the past nine years, I’ve written a financial services and GSE blog.

    My single greatest piece of advice to the Realtors who read about these issues is to kick in the butt your NAR execs in DC, who have tried to placate the Obama Admin and opposed resurrection of the GSEs. It’s that frustratingly simple.

    Look at its record, not what they say to you in you conferences or breakout sessions.

    The NAR is powerful but seems to want to play footsie with the big banks–and Senate baddies like Bob Corker (R-Tenn.)– and others who have their eye on the GSEs revenue not what best for mortgagors or homebuyers.

  • Rob Zimmer. says:

    They will be utilities under the HERA statute of 2008, operating safely with more capital and a federal backstop to keep rates lower. The old GSEs are gone already, and no one wants the Big Banks to take over this marketplace.

    Ideally, Congress would pass a small bill with some tweaks, though this is not necessary. What IS necessary is to keep Big Banks from taking over and harming consumers, Realtors, small lenders, and inner-city neighborhoods.

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