Plan B? For the GSEs, There Might Not Even Be a Plan A
February 1 came and went -- was it 15 days ago already? That was when the Obama administration said it would proffer up some details as to its thinking for the future of the GSEs, Fannie Mae [stock FNM][/stock] and Freddie Mac [stock FRE][/stock], to be part of the overall federal budget proposal. Instead, we got one measly sentence that managed to say nothing at all. “The administration continues to monitor the situation of the GSEs closely and will continue to provide updates on considerations for longer-term reform of Fannie Mae and Freddie Mac as appropriate,” the budget blueprint read. For those of you following along at home, the GSEs effectively create a bond market that dwarfs all but Treasury notes in size. They are fundamental to the functioning secondary market for mortgage securities, and have been operating under the government’s watchful eye for well over a year now -- and all we can get is one sentence? That’s about as much as most press outlets (including ours) are able to get out of anyone over at the Federal Housing Finance Agency these days. The government-appointed conservator’s press office is about as tight-lipped as they come, and this from an administration that heading into an election promised to open things up to the press -- it’s hard to believe it, but the FHFA might have been more communicative during its prior incarnation as the OFHEO. And that’s saying a lot. To be fair, officials at HUD and the Treasury are equally tight-lipped about the GSEs, and likely with good reason: there’s plenty at stake here. Like, you know, the entire system we use to fund mortgages? But rather than providing updates “as appropriate,” perhaps “when we have figured out anything worth sharing” would have been more accurate. I’m getting the distinct feeling that -- at least on Capitol Hill -- there’s plenty of hot air, but not a whole heck of a lot of substance surrounding the GSEs. And sources I’ve spoken to in both New York and DC confirm much of that feeling. Everyone’s wondering what the Plan B is for the GSEs, but the truth is probably a whole heck of a lot less sexy: there isn’t really one, unless you count “more of the same” as a plan. We’ve already got Barney Frank (D-MA), long-time champion of Fannie and Freddie, deciding recently to reverse course and proclaim that the House Financial Services Committee he chairs will look to “abolish” the GSEs and come up with “a whole new system of housing finance.” Why would Frank suddenly turn on the GSEs, and so publicly, too? Because by turning on them, he can support their future. The truth is that the “new system” for mortgage finance here is going to end up looking a whole lot like the old one, regardless of how Capitol Hill might want to package it to the public. After all, it’s our lawmakers that have made securitization (and its close cousin, “originate to distribute”) into public enemy number one, remember? Here are the facts: The existing MBS market is nearly entirely dependent on Fannie, Freddie and the FHA. 75 percent of all mortgages originated in the first three quarters of 2009 were securitized by the GSEs. We’re talking about a market that is roughly $4.5 trillion in size -- that sort of volume and liquidity doesn’t just go away simply because Congress or the public wants it to. And, to cut to the chase, the alternatives being discussed thus far are clear-cut losers. Nationalization? Won’t happen. Can’t happen. Nationalization would require bringing the $6.3 trillion in liabilities at the GSEs onto the federal balance sheet. During a period of record deficits, no less. (For those with a long memory, in 1970, Congress pushed Fannie Mae off of federal rolls for just this very reason.) Public utility? This proposal usually entails removing the GSEs’ ability to manage their own mortgage portfolios, essentially turning them into securitization conduits. As my colleague Linda Lowell has pointed out numerous times, the GSEs’ MBS purchasing activity provides a floor on securities prices (and a ceiling on primary interest rates borrowers are charged). Losing that backstop would drive even greater volatility in mortgage markets than we’ve already seen. Further, remove the mortgage portfolios -- a hedging instrument if ever there were one -- and you can kiss low g-fees goodbye. Risk has to be managed somewhere, after all, so long as we’re forcing a public policy of The American Dream onto these behemoths. Privatization, break-up, Baby Bells? Keep dreaming. For one thing, both Fannie and Freddie are critical to the public policy agenda for public housing, whether we like it or not -- and there won’t be a consumer group in the country that will lobby to see their bread buttered by private enterprise. But much more importantly, the vital and liquid TBA market would cease to be -- to steal language from Linda Lowell, “investors would gravitate toward other bond sectors with more stable reasons to exist.” If you think we’ve got problems with investor confidence now, privatization of the GSEs would exponentially multiply those problems. Which leaves us with reform and continuing the status quo for Fannie and Freddie. For all the the GSE haters out there, let me be clear in stating that this is actually a great thing -- because the questions we should be asking on Capitol Hill have far less to do with the GSEs than they do with our own public policy. After all, the GSEs reflect our public policy agenda on housing, and our focus should be squarely upon debating that policy more so than debating the fate of the GSEs themselves. The American Dream? The idea that all Americans should be able to own a home? The idea that affordable housing represents a viable public policy objective? That foreclosures should be avoided at all costs? These are the real issues we should be debating both in our living rooms and up on Capitol Hill. We don’t need a Plan B for the GSEs. What we need instead is a critical redress of our public policy towards housing in this country. Do that, and the GSEs will take care of themselves. Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine.