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KBW: Plan to wind down GSEs will fail

Analysts say GSEs' survival chances keep improving

Freddie Mac

On Friday, Mary Miller, the Department of the Treasury’s under secretary for domestic finance, said that the administration still supports the wind down of Fannie Mae and Freddie Mac.

“There is no quick fix solution around this,” Miller said at the National Housing Conference Annual Policy Symposium. “Only legislation can protect taxpayers by responsibly winding down the GSEs and replacing them with a system where a government guarantee is transparent and explicitly priced.”

Miller also said that even if rehabilitating the GSEs was possible, recapitalizing the enterprises would be a process that would take “at least” 20 years. “During these 20 years, the taxpayer would remain at risk of having to bailout the GSEs during another downturn,” she said. “We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home.”

Despite Miller’s affirmation that the administration wants to wind down Fannie and Freddie, analysts from Keefe, Bruyette and Woods said that the GSEs aren’t going anywhere.

“We think the headline will be a negative for the two companies,” KBW’s analysts said. “However, Miller's comments do not change our view that the chances that Fannie and Freddie survive are improving.”

KBW’s analysts predict that the Treasury will eventually shift its focus from winding down the GSEs to seeking to unwind its investment in the companies. But the analysts said that this shift could take several years.

KBW’s analysts also say that Miller’s call to wind down the GSEs won’t be the last of its kind. “We expect to continue to see headlines like Miller's comments but we think legislation to unwind Fannie and Freddie will fail to pass Congress,” KBW’s analysts said.

As for the future of Fannie and Freddie, KBW’s analysts said the GSEs' odds of survival keep going up with each passing day. “Inertia is Fannie and Freddie's best friend,” they said.

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