The plan to eliminate Fannie and Freddie is no magic bullet. Vaporize Fannie and Freddie and all will be right with our world, say some, who, given the depth of their life experience, should know. What is clearly so sad is that they really don’t know. Their cavalier “just do it” approach to destroy what has been since 1938 (with the exception of an 8- to 10-year blip) a credible and skilled approach to funding homeownership could be even more financially dangerous for the United States going forward than what the country has now. Case in point: In a recent … Continue Reading →

Mid-October found the U.S. Federal Housing Finance Agency (FHFA) — the regulatory overseer of government-sponsored entities (GSEs) Fannie Mae and Freddie Mac — and the Obama administration considering a limited pilot program that seeks greater private-investor participation through private purchases of first-loss positions in new GSE issuances of mortgage-backed securities (MBSs). This program does not require congressional approval, but it does require the FHFA to sign off. Fundamentally, this program is a risk-sharing arrangement that would allow GSEs to take losses only after the riskiest bonds in the capital structure (expected to be 5% to 10% in thickness) are first … Continue Reading →

The Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac, recently announced that Freddie Mac used faulty analytical methodologies relating to mortgage buybacks in its US$1.35 billion settlement with Bank of America. In effect, FHFA contends that Freddie Mac underestimated questionable 2005 to 2007 Countrywide-originated mortgages and did not take into account teaser-rate loans, whose credit risks differ from more traditional mortgage products. The FHFA senior examiner concluded that the settlement was inadequate and that Freddie Mac had done so in order to preserve its relationship with Bank of America, a large underwriter of loans used … Continue Reading →

The ultimate mulligan that U.S. legislators have given themselves, by way of the Dodd-Frank Act, is the “systemically important” designation, which is reserved for firms that are “too big to fail.” Such a designation allows the U.S. Treasury to save such firms through access to capital: credit lines, asset purchases, repurchase agreements, risk-sharing setups, and direct ownership infusion via preferred shares that lack voting rights. We’ve seen this before in Fannie Mae and Freddie Mac, agencies created by the U.S. Congress to support the housing market through mortgage guarantees subject to certain eligibility requirements. Unfortunately (until Fannie and Freddie were … Continue Reading →

In the recent rush to dismantle government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, it appears that those in charge (government advisors, senators, and the like) don’t quite understand some things — Fannie and Freddie, the U.S. banking landscape, and who is to blame for the mortgage fiasco. Scary thought. If you need a realistic example of government crisis competency, think about the auto workers’ union — what was, until a couple of years ago, a shining example of U.S.-based industry and the free enterprise system — or General Motors and Chrysler. And all GM and Chrysler wanted was to borrow … Continue Reading →

As a response to the US$150 billion bailout of Fannie Mae and Freddie Mac, the U.S. Treasury Department has unveiled a proposed plan for the U.S. Congress to unwind the government-sponsored entities (GSEs). Through their relationship with the government, these GSEs were once able to provide lower-cost funding to homeowners than that which could be provided by the private sector. Unfortunately, this led to GSEs crowding out the private sector and commanding a disproportionate share of the overall mortgage market, eventually leaving the American public on the hook for losses. Until now, these GSEs served two masters: promoting housing in … Continue Reading →