BLOG VIEW: No Shortage Of Opinion On Fannie And Freddie

Written by Jessica Lillian
on September 11, 2008 No Comments
Categories : Blog View

Although the presidential and vice-presidential candidates have failed to offer substantive comments so far (as discussed in Monday's MortgageOrb Blog View), industry analysts have not hesitated to immediately weigh in on the federal takeover of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Right now, as the dust continues to settle, major debate appears to have moved beyond focusing on whether the bailout (a term that, interestingly, seems to have lost much of its negative connotation in recent days) was a Good Thing or a Bad Thing. Most industry insiders, stakeholders and policymakers agree that it was an Unfortunate – But Needed – Thing.

Instead, many observers have now turned their attention to the question of what precise effects the GSE takeover will actually have on mortgage lending, mortgage borrowing, the economy and future U.S. governmental policy.

Craig Focardi and David Hamermesh of TowerGroup, a research and consulting firm focused on the global financial services industry, note that Fannie and Freddie's new stay in a federal conservatorship offers numerous benefits to consumers and the lending markets in general.

‘This takeover will help shore up many concerns around the liquidity of government sponsored enterprises-backed lending,’ Focardi and Hamermesh explain in a press statement issued immediately after the takeover. ‘The Mortgage Bankers Association's origination volume forecasts have been cut repeatedly in the last few months as the situation failed to improve.’

‘TowerGroup expects that this move will change the direction of those forecasts and that the drop in originations from 2008 to 2009 will not be as severe as previously predicted,’ they continue.

Additionally, Focardi and Hamermesh point out that conservatorship in particular also requires fewer tax dollars and thinner financial support from the government than would ‘true nationalization’ of the GSEs.

On other side of the judgment spectrum, John Berlau of the Competitive Enterprise Institute (CEI) writes in a blog post on www.openmarket.org that a government takeover of the GSEs might actually be considered superfluous – and that the recent announcement represents nothing more than a long-awaited admission of historical truth.

‘Fannie and Freddie can't really be nationalized, because they were never really private in the first place,’ he says, adding that the Fannie/Freddie model – privatization of profit and socialization of loss – has long ranked as a major concern for CEI.

‘Even though they had private shareholders, they always retained government privileges,’ Berlau notes in his blog post. ‘The president still appointed some of [the GSEs'] board members, but they were exempt from state and local taxes, and, importantly, they each had a lines of credit with the Treasury.’

Now, he recommends that rather than retaining the agencies in a conservatorship, the government should liquify Fannie and Freddie's assets one by one and transfer them to the private sector. This process, Berlau points out, is exactly what the Federal Deposit Insurance Corporation does to a failed bank, after all.

The CEI is not alone in criticizing the GSEs' longtime position in a murky area – somewhere between public-sector and private-sector. The CMPS Institute points out the government itself has indeed recognized that with its GSE business model and its inevitable conflicts of interest, it had effectively created a monster.

Is this the time to move that monster into solid private-sector territory once and for all? Apparently, the federal government has either decided not to do so or is not quite ready to reveal its grand plan.

‘The one major flaw in the government takeover plan is the lack of a clearly defined exit strategy,’ states Gibran Nicholas, chairman of the institute, in a press statement. ‘The government did not set a timetable for breaking up and privatizing Fannie and Freddie and has effectively pushed off this necessary but politically undesirable task on to the next Congress and presidential administration.’

Stay tuned.

– Jessica Lillian, Commercial Mortgage Insight

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