What Next after Fannie and Freddie?
The recent mega housing report issued by the Bipartisan Policy Center (BPC) proposed replacing Fannie Mae and Freddie Mac with a less robust government entity that would provide investors with catastrophic insurance on conventional mortgage backed securities (MBS), much like Ginnie Mae does today for government guaranteed mortgage loans.
Federal payments only would come into play in an extreme loss situation, after private mortgage insurers and lenders exhausted their financial responsibilities to the MBS investors. Commission report executive summary link follows.
That's a good place to start when/if the Congress begin to restructure the secondary mortgage market, hop[efully after it fully understands the role that segment plays in our extremely dynamic mortgage finance system.
Many Senators and Congressmen--charged with deciding the new mortgage system architecture-- couldn’t comprehensively/intelligently describe today's Fannie-Freddie dominated model,
without staff notes, let alone discuss trade offs, winners and losers, .
without staff notes, let alone discuss trade offs, winners and losers, .
So, if the Commission recommendations force the Congress to toil contemplating market realities, it will be time well spent.
Many Hill conservatives--despite the fact that Commission had two prominent former GOP Senators as Chairmen, including one of whom was the Secretary of Housing and Urban Development—will initially reject this idea because it still contains a seminal federal participation and they think they want the US government out of mortgage finance and that job shaped and managed by the nation's largest bank behemoths, at least that's what the R's think they want.
Banks are the financial institutions from which the the famous Dodd-Frank financial reform bill hoped to strip and erase forever the “Too Big to Fail” identity.
However, it may have done nothing of the kind since--according to last week's testimony from Attorney General Eric Holder--those banks may be both too big to fail but also too big to prosecute.
Oh well, I guess the best laid plans of mice and men, let along Chris Dodd and Barney' FRank sometimes go astray.
Brief Mortgage Tutorial
If House Republicans seem so bent on blowing up Fannie and Freddie, possibly ignoring the Commission, and giving the big banks the keys to the mortgage kingdom, it behooves those officials to ponder if their constituents like the idea of having access to long term fixed rate mortgage financing, i.e. 15 and 30 year fixed rate loans, which provide borrowers monthly payment certainty over the loan's term.
If that answer is “yes”--as I suspect would be the case in most of the congressional districts and states, the question then becomes--then Congress also would have to ask how much more money their voters would be willing to pay—compared to what they pay today—for future access to tho same mortgage types, if Uncle Sam really is out of the picture?
Simply stated, absent some federal guarantee or risk outlet, commercials banks may not choose to originate long term fixed rate loans or only make them at exorbitant prices.
By educating themselves about how our national mortgage market actually works, the Congress will understand why—absent a role for the federal government in mortgage finance—FRM could disappear completely or be available only at relatively high rates.
It's no secret that banks don’t want to hold the interest rate risk inherent in FRM, since banks' cost of funds could rise while that mortgage's yield is static, whether it's for five years or 30 years (which seldom is the case).
That trend to sell loans into the secodnary market--not hold them--has been in place for more than 30 years, not just since our recent financial catastrophe.
Without a F/F or the equivalent, the only way the banks can manage to originate or hold mortgages is not to offer fixed rate mortgages—only adjustable rate loans (ARMs)--or to significantly overprice FRMs. (This point is made in the Commission's report as well.)
Uncle Sam Keeps FRM Available
It's the federal government's implicit/explicit existence in the market that assures fixed rate financing and its availability at reasonable rates.
Today, the fact that Fannie and Freddie are in the market (securitizing virtually every mortgage brought tot hem by banker lenders), is why the FRM exists at attractive rates.
If Fannie and Freddie are gone and nothing with federal ties is there acting as a dedicated investor in mortgage securities, holding them until the underlying loans are retired through borrower amortization and payoffs, then they just might not be made.
Most banks don't want to carry the FRM's interest rate risk, which is why they now offload it on Fannie and Freddie.
Future rates, therefore bank borrowing rates, are unknowable. Unless an investor function is offered by some future market player future--allowing lenders to transfer that concern to others--a bank seeking to offer and hold onto a FRM would have to premium price it.
Only Big Banks as an Alternative to Fannie and Freddie??
It's been suggested by mortgage market observers that an gaggle of large banks—presumably working collectively--might be able to do the job, in place of F&F, but that raises lost of questions.
That arrangement might work in “Oz” but not in our real beggar thy neighbor business world.
Would those banks sublimate their greed and control instincts to work together, since most banks don't play well with others in the same business?
Will those banks have common underwriting platforms—to facilitate standardization and easy trading--or would each want their own flavor?
Is there any antitrust issue here, anywhere?
And, what happens when Bank A decides it wants some of Bank B's market share or all five participating institutions go cannibal on the others?
Will Congress protect consumers interests over the financial institutions, when their constituents seldom match financial institutions' campaign giving?
Many of those sidebar concerns just don't exist when you have a F&F or possibly something like the Commission’s ideal solution, since any preferred federal entity will play a keystone presence, make most of those rules and maintain consistency.
F&F Income Force Questions for Congress
And that doesn't include how you replace all of that attractive revenue which Freddie's 2012 earnings announced last week foreshadowed for both the former GSEs in 2013 and beyond.
Those earnings are “cooked” going forward, meaning they only will get better (and larger).
You'll soon hear what Fannie's earnings were (reportedly much higher than Freddie's) and—once you extrapolate--you'll need to decide what should happen to that estimated $120 billion (low)-$160 billion (high), the two could pass on to the Treasury in the next few years.
Do you really think the Obama Administration will cede the entire residential real estate market to those major banks, which—speaking of campaign contributions—went very light when giving to D's last year, but very, very heavy backing Mitt Romney and the GOP in 2012?
Even the Commission's major secondary market recommendation would have/leave the federal government in the picture –albeit not as grandly as it is today--and provide more federal subsidies to the banks to risk their “private capital”on residential real estate.
To those of the House majority who understand money and the markets, please realize that banks rely on and enjoy federal subsidies like many industries, but claim they don't.
Conservatives and their allies are not serving their voters or the broader American public, if their only answer to safe and reasonable mortgage financing is to pacify and pay the banks to perform, giving them exclusive markets (jumbo mortgages); subsidizing their working capital (see FDIC insurance); providing easy money through the Fed discount window and Treasury cash infusions (the latter with no reciprocal responsibility to invest in their communities); friendly federal overseers; and a judicial system which may shrink from prosecuting the banks.
Just think back to the years building up to 2008 for what could be a an ugly preview of the financial rules you seem to want to prevail, again.
The man is back and sees a disturbing pattern of attack and equivocation
In his latest contribution to Op Ed News (and the world), the sharp eyed David Fiderer caught some significant “my bad's” (admitted errors) from some Fannie Mae and Freddie Mac critics, who testified last week before the latest House Financial Services Committee Fannie/Freddie witch hunt ,designed to cast major blame on the two for the 2008 financial meltdown.
While nobody could claim it was a F/F love feast, some of the witnesses seemed to recant key positions they've taken in the past when they blamed Fannie and Freddie for perceived, almost exclusively, systemic failures.
I'll let you read Fiderer the Master's work rather than trying to parse it. But his writings should be required congressional reading, so Congress sees what really occurred in mortgage finance leading up to the 2008 debacle.