Lending The Ticker

Wall Street Journal op-ed ethers 'toxic twins' Fannie Mae, Freddie Mac

WSJ takes blowtorch to GSE risk-sharing measures

fire alarm

For the second time in the last ten days, the editorial section of a major national newspaper has taken on the future of Fannie Mae and Freddie Mac.

Earlier this month, the Washington Post weighed in on the recapitalization and release of Fannie and Freddie, calling it a “recipe for housing disaster.”

But that’s nothing compared to the editorial that showed up this week in the Wall Street Journal.

In an op-ed sarcastically titled “Fannie and Freddie Forever,” the Wall Street Journal ethers Fannie, Freddie, the risk-sharing programs undertaken by Fannie and Freddie, the Federal Housing Finance Agency, and the entire federal government for supporting the conservatorship of Fannie and Freddie.

Here’s how the op-ed starts:

Washington is a place where bad ideas go to live forever. How else to explain the latest innovation from federal regulators to keep Fannie Mae and Freddie Mac dominating the market for mortgage finance?

And that’s just the beginning of the attacks on what the WSJ calls the “toxic twins.”

Again from the op-ed:

These days the Federal Housing Finance Agency that supervises the twins under federal “conservatorship” seems to view itself as the official preserver of Fan and Fred’s market share. So instead of simply telling the mortgage giants to stop buying and guaranteeing so many mortgages, the regulator has been encouraging the use of ever more complex financial instruments to keep Fan and Fred at the center of this multi-trillion-dollar market.

The WSJ editorial takes umbrage with the risk-sharing programs that Fannie and Freddie have been pushing over the last year.

Again from the WSJ:

You won’t be surprised to learn that investors have been more eager to take on mortgage risks via these new Fannie and Freddie securities than via private mortgage-backed bonds, a market that has hardly revived since the financial crisis.

Why would investors rather deal with Fan and Fred than with a private seller of mortgage risk? Well, it could be because the Beltway geniuses who brought us the housing crisis are so much better at selecting quality mortgages and managing credit risks than private firms. Or could it possibly be that investors prefer having Uncle Sam standing behind the deal? When housing mania turns to financial panic, history shows that Washington will protect debt investors who buy paper from Freddie or Fannie no matter what the companies claimed beforehand.

The whole thing is worth a read, but here’s the closing haymaker:

You’ll be happy to know that investors are enjoying fat returns while the toxic twins get political cover to continue their central role in mortgage finance. And the Beltway crowd wonders why Donald Trump is winning.

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