Tuesday, March 18, 2014

What is Going to Happen to Fannie Mae and Freddie Mac?

A quick update on the fate of Fannie Mae and Freddie Mac from Market Watch.  The article below is an opinion piece with a few news updates added.  This post goes along with my previous post that home ownership is going to become more difficult in the future due to high minimum down payments, higher interest rates, higher credit standards, and higher transaction costs.  Whether this is a good or bad thing is another issue.  But, as stated in the previous post I do not see a strong home price appreciation in many markets going forward due to the rising cost of home ownership.
After decades supporting a political and economic creed that honored affordable and accessible home ownership, Washington is trying to shift gears on a $9.9 trillion system without grinding the machine to an abrupt halt.
A bipartisan team from the Senate Banking Committee reached an agreement Tuesday (March 11) on a broad bill that would unwind Fannie Mae and Freddie Mac the government-sponsored mortgage companies bailed out by taxpayers and placed under conservatorship during the financial crisis.
The plan replaces the god of government backed housing for a more private-market model. It would replace Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.
Private enterprise was all but eliminated from the mortgage finance process as banks dumped massive amounts of mortgages into the laps of Fannie and Freddie in the run up to the meltdown. The government and taxpayers gradually shouldered the entire mortgage load.
The intended benefit of the system was that it made housing cheaper and available even to those with less than credit-worthy profiles. The unintended consequence was an uncompetitive and distorted marketplace where home buyers underpaid for their loans and the risk was borne by everyone.
The trick for the new bill will be its ability to reintroduce some shared risk-taking and market pricing to an industry that was, if not socialized, then financially engineered by the government in the politically driven zest to create the widest, easiest path to a “man’s (or woman’s) castle.”
Ultimately, prices will certainly go up as private insurers, bond originators and investors will demand more of a premium to offset risk. To shift a system built over four decades amid a fragile housing recovery will take a lot of patience and political nerve — the lack of which got us into this mess in the first place.
Further comments from the Senate later in the week indicated that the chances of this bill passing in a midterm election year are fairly slim (CNBC).  After all, how do you explain to your constituents that the government is not going to help the housing market in your district or state.  In addition both Fannie and Freddie (GSEs) provide some fairly nice profits that go back to the government.  Lastly, there is the question of who profits from the dissolution or break-up of these GSEs,  Right now it could be those "pesky" hedge funds.  All this needs to be sorted out before this bill can move forward.  There oftentimes is a big difference between economics and what can really be done politically.  "O what a tangled web we weave . . ." -Sir Walter Scott

Last note.  The bill was introduced in the Senate on Sunday March 16 (Market Watch).  

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