Fannie/Freddy Reform Nowhere In Sight

Since 2008, the mostly agreed upon date for the onset of the Great Recession, lots of responses to the crisis have occurred. Stimulus came and went, Dodd Frank passed, the Volker rule was enacted yet not to date implemented, the CFPB was let lose on the land, the Fed embarked on a continuing mission to better the economy via asset purchases, various banks have been fingered as agents of the financial crisis and meltdown of the housing market. Oh, and Fannie Mae (FNMA) and Freddie Mac (FMCC) basically went toes up and were put into government conservatorship where they languish to this day.

Actually languishing is not quite correct, they’re thriving. The two have gone from commanding a lions share of the mortgage market to effectively being the only game in town. In the process they are minting money. Together the two expect to have returned by the end of this year virtually all of the $180 billion they borrowed from the government to stay afloat. Note that this gusher of money is not coming to an end anytime soon as Fannie and Freddie are just forking over their profits as dividends to the Treasury, technically they haven’t repaid a dime. It’s entirely possible that these two companies are the most profitable enterprises in the Universe, such being the rewards which flow to virtual monopolies.

Now from the day that Frannie collectively came under the wing of the government there have been righteous statements (do politicians make any other sort?) about getting the government out of the mortgage business, reforming the entire system and along the way making sure that the ultimate solution is bullet proof enough to survive until the end of time. So far we’ve not progressed beyond the bloviating phase.

That’s not to say that there haven’t been plans floated about to change the status quo. Most recently several hedge funds have come forward with proposals to take over the two. Mostly this amounted to a fair bit of financial engineering which would reward their speculative position in the still trading shares of the two companies and leave them in charge of the monopoly. If you want to get down in the weeds, Matt Levine has an excellent analysis of their proposal. Somewhat predictably the Obama administration in the person of economic adviser, Gene Sperling, suggested that no they didn’t think they would be selling Frannie to hedge funds at this time. All sorts of difficulties remain to be ironed out and , well,  the optics just aren’t all that good.

Mr. Sperling then went on to offer some further comments on the two and their future. Actually he mostly went back to righteous comments and affirmed, as every other politician does as well, that Fannie and Freddie needed to go away but there still isn’t a clear way to that goal. The one serious bipartisan (a rare bird indeed) effort to reform the two is known as Corker-Warner. It replaces Frannie with, well, kind of a new Frannie but this time they really, really mean to play tough with borrowers and absolutely, positively not turn the new Frannie into a slush fund for politicians. Mr. Sperling says the administration sort of likes this.

We were very engaged in helping when asked with the drafting of the Corker-Warner legislation. That doesn’t mean that we agree with every aspect of it, but we saw it as a good and constructive effort and it was worthy of our cooperation. What Sens. Corker and Warner put together is an important start … but ultimately for this bill to happen, we will need the leadership of Chairman Johnson and Ranking Member Crapo. And we are working very closely with them on that. We believe that there is no reason that we should not try to move as quickly as we can to explore the possibilities of how fast we could pass out of the Senate Banking Committee bipartisan legislation.

Does the phrase, “damning with faint praise,” jump to mind? I’d say that Corker-Warner has only a smidgens more chance of getting past the President than did the hedge fund proposal.

Realistically, 5 years after the crisis, we are no closer to any sort of resolution of the Fannie/Freddie issue. In fact, I’d argue that we will probably not see any serious reform effort until 2017. If that suggests politics to you, as in 2016 elections, well then you’re on the same page with me, but 2014 is playing a big part as well. Here are some things that are going to get in the way of any real movement.

Money 

The government has a claim on all of the profits of Fannie and Freddie until 2018. In the third quarter of this year the two posted a combined operating profit of $15 billion. Keeping in mind that they still have a historically high amount of nonperforming assets dragging down their results, it isn’t unreasonable to assume they’ll rack up somewhere in the neighborhood of $60 billion per year to shovel to the government. That’s probably conservative, but let’s go with it. The deficit for fiscal 2013 came in at $680 billion. Assuming similar results for 2014 and the same level of profits for the two, they impact just under 10% of the overall deficit. Even in Washington that’s real money. There are 60 billion reasons for both sides of the aisle to slow walk any reform. Count on that result.

Mel Watt/2014/Filibuster

Up until yesterday, the Fannie/Freddie honey pot was pretty much off limits guarded as it was by Edward DeMarco, the acting director of the FHFA which is the conservator of Fannie and Freddie. DeMarco is a rare bird in that he took seriously his charge to preserve and conserve the the assets of the twins. To say he has been a thorn in the side of the crowd who have pushed for an activist stance to resolve the housing crisis is to minimize the aggravation of a thorn embedded in any part of one’s body. Until the last few months the administration has been content to grumble about the man, but finally gave into pressure and nominated Mel Watt, a former congressman, to become the permanent head of FHFA.

Watt is, by profession a lawyer, but has since since 1993 represented North Carolina in the House. His political career has been heavily financed by the banking and real estate industries, so there is an element of the fox and the hens clouding his nomination. Just to bury the guy a bit more, he has nothing in terms of expertise as it relates to the mortgage business to recommend his nomination. Watt was dead in the water in terms of confirmation, for reasons we shall get to in a brief moment. He will likely now be close to first in line as a result of the decision to modify (if that’s the right word) the filibuster rules in the Senate.

That Mr. Watt’s nomination was dead in the water represented nothing personal on the part of the Republicans, they just weren’t anxious to turn over Fannie and Freddie’s honey pot to an appointee of the Obama administration. With DeMarco in charge about the only place money was going to flow was into the Treasury’s coffers, with Watt in the drivers seat on the cusp of an election year they rather reasonably expected the powers of the two to be unleashed in a manner designed to, shall we say, sway voters. DeMarco for example has resisted all calls for radical mortgage modifications including principal forgiveness. Watt is unlikely to be so reticent. After all a few million well targeted underwater borrowers who suddenly find themselves with positive equity are likely to be more than a little favorably disposed towards Democratic candidates. Opening the spigots to the affordable housing crowd serves to fund another constituency not noted for its support of conservative causes. And, thanks to Jamie Dimon, Mr. Watt will find himself with around $4 billion burning a hole in his pocket.

Do you really think that the Democrats have any interest in upsetting this apple cart in 2014?

2016 Elections 

Any meaningful reform of the mortgage GSEs is going to have to past muster with the housing industry. That group includes Wall Street, realtors, home builders and mortgage bankers. Together they’re one of the most powerful lobbies in the country given that they operate at both the national and local political level. To date, passing muster with them has meant pretty simply the maintenance, in one form or another, of an overwhelming federal government support mechanism for the mortgage market. No viable candidate for president can afford to get on the wrong side of this group going into the 2016 elections and that means that neither party is likely to place their candidate in jeopardy by pushing reform beyond merely the cosmetic. Serious reform is out of the question until a new president is sworn in.

With luck it’s possible that sometime in 2017, nearly a decade after the crisis, somebody will step up and actually force through some serious new system of mortgage finance for the US. Then again, it’s entirely possible by then that memories will be so dim that many will ask, “What’s the problem, everything seems to be going along just fine. Why fix what ain’t broke.”

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