Dalrymple column: Let Fannie and Freddie do what they do well
Are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., or Fannie Mae and Freddie Mac, or, as they’re even more intimately known, Fannie and Freddie, important to us common folk?
Well, yes, it turns out that they are. Because, together, they form a fulcrum on which most of the housing in the U.S. is leveraged. And shelter is important to all of us. Which in turn means that housing is vital to the economy.
How important? Remember, that the Great Recession of 2008 was triggered by a housing bust. That bust resulted in Fannie and Freddie, both “private enterprises with a public purpose” being taken over by the federal government. Before that happened, the stock in these sister entities was gold plated, so much so that, on the balance sheet of FDIC insured banks, it was viewed the same as cash.
When Congress, regulators and economists began assessing the damage from the crash, one of the major considerations was how to fix Fannie and Freddie, most likely through a complete restructuring that would make the government sponsored enterprises (GSEs) no longer government sponsored, but completely private corporations, just like, say, a mega-bank like Chase.
This restructuring was a top agenda item under the last administration and has been under the present one also. Or so we’ve been told.
But nothing much seems to have happened; why?
Probably because Fannie and Freddie seem to be working very well, and, if left alone, might continue to do so, even during future economic downturns which, inevitably, will happen.
The outline of the new corporations was supposed to have been well defined by now, and the legislative process underway to make the changes into reality close to closure. Yet Secretary of the Treasury Steve Mnuchin recently said that the reorganization process is still a primary focus and should be well along by next year. But, he added, that nothing definitive is ready, at this point.
Which means that nobody is really sure what to do, or if, in fact, they really want to do it: Messing with a working machine is never a good idea.
We probably need to take a breath and remember what these enterprises actually do, and it’s pretty simple: They buy mortgages, package them into mortgage backed securities, and sell these securities to investors, who realize a return on their investment as borrowers repay the loans. If the loans are good loans, the securities are good securities, and the investment return is assured.
The crash of ’08 was a result of the loans backing the securities being bad loans, and they were bad loans because of bad underwriting or, in many cases, no underwriting at all. Mortgage backed securities have been a major element in financing and investment for over 70 years, since the end of World War II. Since 1945 the Government National Mortgage Association (Ginnie Mae) has issued billions of dollars of securities backed by FHA insured and VA guaranteed loans, with never a default on the paper. And there was never a meltdown in connection with those loans that compelled the federal government to call on the taxpayers to pony up to make good on the guarantees. Because the underwriting of the individual home loans was stringent.
Fannie and Freddie performed just fine when adhering to well-defined, common sense qualification guidelines. In fact, a major cause of the Meltdown was that their past performance was, in fact, so exemplary. The track record of securities backed by U.S. home loans stood out for capital looking to turn cash into yield, safely and securely. So the world’s investors wanted more and more of this paper, and everybody worked very hard to create the product, and kept creating long after they ran out of good loans.
Probably the administration would be well advised to continue “focusing” but move slowly in tearing down and rebuilding. Let the enterprises go back to their roots and basic business, and ratchet down the tinkering for a spell. The federal government has unequivocal regulatory power over the two entities, and can examine, dictate and restrain them just it does insured financial institutions. They’re profitable and working well. Let them pile up reserves on their balance sheets to weather coming recessions, and make sure that they’re buying good residential mortgages.
If it ain’t broke, don’t fix it.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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