Thursday, November 15, 2012
F&F Generate Solid Earnings
Fannie and Freddie and Some Election Leftovers
“Anonymous,” writing in the comments section of my last blog, requested more discussion about Fannie and Freddie.
I also wanted to note a few things which came via the Obama victory and the behavior of voters across the country, involving religion and marijuana.
Fannie's and Freddie's Positive Earnings Mean…..?
If you ask people who follow Fannie Mae and Freddie Mac what the future holds for the two, since both--as wards of the federal government--still dominate the national secondary mortgage market for conventional loans, the answers are many but similar.
“Leave them alone, they are working fine, not bothering anyone and they are paying back the government faster than anyone believed,” is the gist of most.
The federal government, beginning in 2013, will sweep every penny the two earn to repay their borrowed Treasury funds, estimated at approximately $135 Billion outstanding for both. (Rough numbers: Fannie still owes @$85B and Freddie owes @$45B.)
Fannie’s regulator the Federal Housing Finance Agency (FHFA) estimated that the two entities could probably repay that amount in about 10 years, based on their current very positive earnings and the fact that each has told the government they no longer will require Treasury’s quarterly cash assistance.
Freddie’s 2012 third quarter earnings, after paying the Treasury $1.8 Billion, were a net $2.9 Billion. Fannie, the larger of the two and the greater debtor, netted $1.8 Billion after paying the government $2.9 billion in dividends.
One more quarter remains in 2012, which also should be a money maker, and then all of their profits go to the Treasury. Their 2012 net earnings stay with the companies and act as an additional capital cushion.
Again, discussion with some smart people about F&F’s future, range from nothing will happen because the two are making too much money for Uncle Sam (most), to a redesign F&F in a hybrid model (fewer), to full privatization and reactivation (fewest).
Pitching Out Bath Water and the Babies
The two do represent “golden geese” in a town where there ain’t many of those, and except for ideologues, recently, there have been no great calls for them to stop providing the huge financial support to the mortgage market they currently offer.
That might change when returning House and Senate Republicans (fewer in 2013) decide they want to pick a fight with the Obama Administration, but, again, most observers don’t expect that to occur or succeed.
At the other extreme are folks like me who see the two—with a few legislative alterations—being able to take advantage of their serious and solid regulation and resurrected as purely private entities, raising their own capital with limited or no federal support and bringing fresh “private money” into the mortgage markets.
Given a now profitable Fannie and Freddie no longer borrowing but repaying the government, some see Congress looking at them as a possible “utility,” a candidate for some hybrid role, where the two (and others?) function as government blessed secondary marker principals but with limitations on how much they can buy, securitize, portfolio or earn.
Then there are the diehards who still insist that Fannie and Freddie should be figuratively burned at the stake for perceived transgressions.
Arguments used by the “obliterate them” crowd have been rejected by pretty important mortgage people, including the Federal Reserve Board, the President’s Financial Crisis Inquiry Commission, and a variety of noted economists and publications.
To be fair, with the political world focused on the recent congressional and presidential elections, this subject has not gotten a lot of timely attention, as Fannie and Freddie are further embedded in the day-in-and-day-out process of approving, via automated underwriting, and funding mortgage applications for million of American families.
The question of their fate and resurrection ultimately becomes a political one.
Can the new Congress and Barack Obama, who no longer has to fear reelection, quickly understand and disperse the many myths about Fannie and Freddie and begin to see them as part of a solution not part of the problem?
Ditch the Anger, Choose What Works, and Everyone Can Win
Can their more vociferous ideological enemies swallow some of that bile they hurled for years at Fannie and Freddie and grudgingly consider them in a positive light?
Can those same policy makers see the operational pluses that Fannie and Freddie offer and appreciate the systemic virtue of a smooth arrangement that Realtors, homebuilders, large and small community lenders, mortgage insurers, and consumers know and understand—a system which benefits them all currently?
I continue to believe the large commercial banks--which historically have been among Fannie/Freddie opponents--benefit from the model, because it allows lenders to quickly transfer mortgage risk to F&F, investors better able and more willing to manage those.
The F&F system is a familiar one that most mortgage professionals grew up with and work in today. But, for now, that system is financed exclusively by Uncle Sam’s dime and that needs changing.
I’ve read the American Bankers Association policy on this (important because all trade associations are “bound” by their policy statements, until formally changed) and I see no reason why mortgage system professional cannot come together-- before the new Congress cranks up in January –and shape a draft bill which keeps Fannie and Freddie in place, but not as part of the government possibly transitionign from their current role.
The two companies first would have to repay the government or have in place an enforceable repayment agreement (think 15 year mortgage!). Like minded mortgage industry groups then could offer their idea to the Congress as a viable restructuring of the nation’s residential mortgage market.
I believe this can happen with the former GSEs not having any emergency ties or credit lines to the federal government.
Few of us know much about this man’s personal life except what recently has appeared in the media, but one part of me thinks—after he and Mrs. Petraeus make a decision about their future together or apart—the United States government should find a very useful and valuable role for the General Petraeus’s military skills and expertise.
I still am confused (and likely dazed) over “Ambassador Kelley” and her request for diplomatic protection!!
Mormons and Our Religious Tolerance
Good for us.
After the Romney defeat, I remarked to a solid Romney supporter how impressed and pleased I was that during the Romney/Obama contest, I heard nothing about Romney’s religion or any aspersions cast by Obama allies on Mormons or the Church of the Latter Day Saints (LDS).
He agreed with me and noted there was some of that during the GOP primary, where Evangelicals and other conservative Christians had reservations and, in some cases, active opposition to anyone Mormon. Shame on them.
Maybe this past election did represent a forward step.
As both parties fight over fiscal cliff issues, I hope somebody is watching the forest and not missing it for those trees.
We have a rare opportunity to save a gazillion dollars and do the right thing.
For common sense, fiscal, and social policy reasons, I believe now would be a perfect time for the Congress—and the President—to kick the shackles from some backward thinking, follow the leads of Washington state and Colorado and endorse the decriminalization of marijuana, emptying our jail cells of anyone found guilty of a marijuana possession crime and offering a national recreational use plan to regulate and tax the weed.
Cleaning marijuana offenders from our penal instituions would save billions in local and federal dollars. Stopping the criminal pursuit of pot users and suppliers (with some caveats regarding the latter) will allow our police to concentrate on serious crimes and also save money. It could moot a huge portion of the Mexican and South American drug production problem, by substituting approved legal US domestic cultivation and sales, which be supervised.
Regulating and taxing "grass" will boost Treasury revenues by untold billions and finish the farcical and delusional efforts to replicate alcohol prohibition of the 1930’s—which also failed.
This federal windfall will be welcome deficit reduction and allow for thoughtful health care for those—not unlike some alcoholics—who over indulge in smoking pot.
One Final Thought
Don’t sweat the “fiscal cliff.” The President sand Congress will reach an acceptable accommodation that won’t all be about CYA.