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Fannie Mae and Freddie Mac: Senate Banking Leaders Reach Deal

valuewalk.com | March 12, 2014

By Michael Ide

US Senators Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) have made a new proposal for reforming the US mortgage industry that falls in line with last year’s proposal from Bob Corker (R., Tenn.) and Mark Warner (D., Va.), but getting bipartisan support will be a major problem, reports Nick Timiraos for The Wall Street Journal.

The proposal would set up a system of private companies that release a common security, much like Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) currently sell securitized mortgages under the current system. The new common securities would have an explicit government guarantee, but it would only be honored after all of the private companies had failed, forcing private investors to take losses before taxpayer subsidies kick in. According to Crapo this proposal “provides a balance between providing broad access to mortgages while protecting taxpayers from losses.”

“There is near unanimous agreement that our current housing-finance system is not sustainable in the long term,” said Johnson, but the problem isn’t that many other legislators and interest groups want to keep Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (though some do), it’s that there is very little agreement on what the future system should look like. Conservatives want the government to get out of the secondary mortgage market entirely, while centrists and liberals have different ideas about how far the government should go to encourage affordable home ownership.

Fannie, Freddie have recovered strongly since 2008

The new proposal looks like a final stab at getting rid of the government sponsored enterprises (GSE) that had been maligned during the financial crisis, but have come roaring back to profitability. Aside from the normal legislative inertia that makes reform difficult the further you get from a crisis, it’s hard to argue that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) should be shut down when they are clearly doing so well. Supporters of the GSEs say that improved underwriting standards and liquidity requirements are all that’s needed to prevent a future taxpayer bailout.
Income sweeps continue without plan for the future

Investors who have purchased senior preferred shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be watching the developments closely as they try to force the government to pay out dividends that were promised in 2008 (several lawsuits are underway). The US Treasury Department announced a full income sweep in August 2012 that left no money behind either for paying out dividends or for recapitalizing the two GSEs, leaving them in the awkward position of being slowly unwound while there is still no agreement on what will come next.

Back to March 2014 Archive

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