Rep. Paul Ryan, R-Wis., the Republican vice presidential nominee, wants to do away with Fannie Mae and Freddie Mac and privatize the secondary mortgage market. But while there may be a lot of sympathy for that idea, given the amount of money the government-sponsored enterprises (GSEs) have cost taxpayers, it may not be that easy to accomplish.
Ryan, in his capacity as chairman of the House Budget Committee, authored the fiscal 2013 budget resolution that called for privatizing Fannie and Freddie ‘so they no longer expose taxpayers to trillions of dollars' worth of risk.’ The Ryan plan – formally titled ‘The Path to Prosperity: A Blueprint for American Renewal’ – calls for the ‘eventual elimination of Fannie Mae and Freddie Mac, winding down their government guarantees and ending taxpayer subsidies.’ According to Ryan, the future to a successful housing finance system can be achieved through ‘various mechanisms intended to bring back private capital, shrink the GSEs' retained portfolios and increase transparency and accountability.’
‘The housing finance system of the future will allow private-market secondary lenders to fairly, freely and transparently compete, with the knowledge that they will ultimately bear appropriate risk for the loans they guarantee,’ Ryan wrote in his plan. ‘Their viability and profitability will be determined, not by political favoritism, but by the soundness of their practices and the value of their service.’
While those may be noble goals, how realistic are they? And do mortgage market participants, as well as homeowners and buyers, really want them?
‘It's desirable if Fannie and Freddie don't have such a dominant portion of the market,’ says Rick Sharga, executive vice president of Carrington Holding Co. in Santa Ana, Calif. ‘But desirable to get rid of them entirely? Probably not. I'm afraid that train has already left the station – government will always have a role.’
‘We need the government to keep Fannie and Freddie,’ argues John Robbins, president and CEO of San Diego-based Bexil American Mortgage and a former president of the Mortgage Bankers Association. ‘The basic model is unbroken and is the envy of the financial world. We went astray, allowing them to become public companies shifting their fiduciary responsibility from providing market liquidity to creating shareholder dividends. But the plane still flies.’
Robbins concedes that the GSEs' activities need to be reined in. ‘Their operations should be limited to providing market liquidity for traditional mortgages only and prohibit them from creating investment portfolios which subject the taxpayers to undue risk,’ he says. ‘If we had stuck to this model with fully underwritten, plain-vanilla 30- and 15-year fixed and one-, three- and five-year adjustable product, our GSEs would not have cost the taxpayers hundreds of billions of dollars.’
‘I don't see any scenario where the government isn't tied to housing finance in some fashion for decades to come,’ says Jim Cutillo, president, CEO and founder of Indianapolis-based Stonegate Mortgage Corp. ‘The role of the GSEs may change, as more of an insurer of mortgage-backed securities versus issuers. Until there are some decisions made on what is or what isn't a qualified mortgage and risk retention, there won't be any private market. There is just too much uncertainty right now.’
Indeed, assuming getting rid of Fannie and Fannie were politically possible, an even bigger question is what would take their place. The private market has been virtually nonexistent since the financial crisis of 2008, when the two GSEs were taken over by the government and placed in federal conservatorship.
‘The problem is you can't eliminate Fannie and Freddie immediately without a private market to take their place, and right now there is virtually no private market,’ says Peter J. Wallison, a fellow at the American Enterprise Institute, who created a plan similar to Ryan's back in 2011. ‘The first part is a very difficult problem politically, and the second part is a problem economically and financially. You have to reduce Fannie and Freddie's share and have the private market simultaneously take their place.’
Is Wallison's idea feasible? Scott Stucky, chief operating officer of DocuTech Corp. in Idaho Falls, Idaho, believes that it is.
‘Fannie and Freddie were privately funded for 40 years,’ says Stucky. ‘The key to fix all this is to get private money back into the market. But for that to happen we must have consistency and an end to uncertainty for originators. They don't know what the rules are going to be, so they are not doing all they can do to approve people.’
‘A couple of issues need to be resolved,’ Sharga adds. ‘There is the lack of transparency in the secondary market – investors have to know what they're buying. Then, there is the continued lack of certainty in the value of the underlying collateral. It doesn't help to have local governments talking about eminent domain takeover of distressed mortgages and the federal government pushing balance reductions on mortgages. That's not terribly enticing for investors to get into this market.’
‘The problem is that Congress hasn't been consistent about what to do about Fannie and Freddie,’ Wallison adds. ‘You need a credible plan that will cause the private market to believe that Fannie and Freddie are going away and encourage private investors to come in.’
Robbins says the GSEs themselves could be used to facilitate a transfer of the market to the private sector. ‘It is very simple for Fannie and Freddie to raise their fees as a securities market emerges, allowing the private sector to absorb the bulk of mortgage production and step in later, as needed, to provide greater liquidity if investor appetite declines,’ he says.
Still, Wallison notes, many segments of the housing and mortgage industries, including home builders, real estate agents and mortgage bankers, do not want to give up the government's oversize role.
‘There is plenty of support for that in Washington, unfortunately,’ he says.
George Yacik is a Stratford, Conn.-based financial writer. He can be reached at firstname.lastname@example.org.