The Senate Banking Committee has just voted out a bill that would dismember Fannie and Freddie, against the advice of many mortgage industry experts. Fannie is, of course, the Federal National Mortgage Association (Fannie Mae), while Freddie is also known as the Federal Home Loan Mortgage Corporation (Freddie Mac.) Together, these two Government Sponsored Enterprises purchase most of the “A” mortgages on one to four families homes in the United States. With a still-shaky economy characterized by a roller coaster real estate market, what affects residential mortgages in the United States will have major consequences for the overall health of the economy. Industry experts are cautioning the administration to go slow on mortgage reform but, so far, those admonishments have been falling on deaf ears in the Obama Administration.
Ever since they arrived in Washington, members of the Obama Administration have been trying to figure out how to replace Fannie and Freddie with a new system under which the federal government would directly guarantee the risks assumed by commercial banks on residential real estate loans. The Administration-backed bill voted on today represents the culmination of a decade of distrust and mutual recriminations between the federal government, through two different administrations, and the two mortgage financing agencies, which were once widely feared in Washington because of their political clout.
Fannie and Freddie used up most of their political collateral when they went, hats in hands, to the federal government in 2008, looking for the government bailouts they needed to survive the collapse of the Housing Bubble. That gave the Obama administration the opening it needed to take on the more politically savvy and much larger Fannie Mae. Since then, however, Fannie and Freddie have paid back the money the federal government lent them, with a three percent premium on top of that. The federal government still holds 79.9 of the outstanding shares in each of the “Guvies,” as they are called in the mortgage industry, leaving just 20.1 percent in the hands of investors. The federal government’s stake in the Guvies comes to $4.087 trillion for Fannie at today’s current share price of $4.41, and $2.285 trillion for Freddie at their current price of $4.41. The total investment of $6.372 trillion is more than one and a half time the total federal budget for 2015 of $3.9 trillion.
Getting out of the mortgage business by privatizing the functions of Fannie and Freddie could mean an enormous windfall profit for the Obama Administration’s last two fiscal years. Shutting down the Guvies would require an “unwinding process” with the probable sale of stock to a new entity that would serve as a clearinghouse for secondary mortgage underwriters, and that might allow the government to liquidate its stake in Fannie and Freddie at a profit, instead of taking a bath on possible losses. Mortgage experts contacted today all agree on one point, however. Trying to fix the secondary mortgage market in the US is rather like building a house of cards in a wind storm.
The Senate Banking Committee’s 13 to 9 vote does not bode well for the bill when it reaches the floor of the Senate. Several key senators, on both sides of the aisle, have not “chummed up” on the administration’s plan to restructure the banking industry. Regardless of how the bill does when it reaches the floor of the Senate, it will be dead on arrival when it gets to the House. With the most important mid-term election in decades coming up this fall, there is little likelihood that anyone in the lower chamber would want to vote for a bill that would probably make it more difficult to get mortgage in America that it already is.
Whether or not the administration’s bill would have that effect is open to question but the issue is so complicated that it can easily be spun either way by either party’s candidates. Washington insiders are already predicting that the bill is on its way to legislative oblivion and, if the Obama Administration is rendered into even more of a lame duck by a Republican victory in the Senate this fall, mortgage banking reform may be destined for a long stay in the purgatory of questionable legislative initiatives. No matter how they feel about Fannie and Freddie, House members are just not going to catch this hot potato bare handed, preferring to leave votes on the dismemberment of the two mortgage giants to the next Congress, if then or ever.
By Alan M. Milner
Look for me on Twitter:@alanmilner