Neither political party wants to openly address the $140 billion remaining public bailout of Fannie Mae and Freddie Mac that transpired during the housing crisis, says Josh Rosner, managing director of Graham Fisher & Co. And while there are solutions previously proposed to ensure a repayment on the public debt, Rosner says there’s no concrete plan solid enough for interested stakeholders to rely upon.
Rosner is taking both political parties to task for their silence on the housing agency bailouts, stemming all the way back to 2008.
While numerous private sector companies have paid back their public debt, Rosner says the government-sponsored enterprises are still tied to $140 billion in public debt, which is essentially the money lent to the agencies minus dividends paid.
“It’s worse than them not looking into the bailout,” said Rosner. The real problem, he noted, is that in conversations with politicians it seems the Republicans want to ignore the debt altogether and move forward to a world where Fannie Mae and Freddie Mac no longer exist.
On the Democratic side, it’s a touchy subject to raise because the party fears it’s already perceived as being too close to the GSEs, Rosner explained. The end result is a conspiracy of silence and a general belief that even with the GSEs technically functioning as private companies, the position of stockholders and preferred shareholders is moot.
Back in August, the Treasury directed the GSEs to pay only a 10% quarterly dividend on preferred stock that the government owns. The idea is that when the GSEs earn profits again, all of the excess will be swept into a future fund. The intent of this plan is to eventually use earnings from Fannie and Freddie to benefit taxpayers as payback, but questions have already been raised on when the agencies will be able to return billions received in public funds.
Rosner also suggested this method creates uncertainty as to whether interested parties will ever be fully repaid. “More importantly though what you end up with is the government commingling agency profits with the government balance sheet. The problem is it seems to violate the legal structure of the conservatorship,” he explained. Not to mention, the firms still have private shareholders worrying about the impact on them.
He added, “When you are commingling (them) you are not preserving the assets for all stakeholders, you are sweeping them for the benefit of one stakeholder.”
The other fear Rosner has is how willing or unable the government is to eventually end the close relationship.
“Legally it creates issues once you start commingling the enterprises’ profits with general revenue for the government,” Rosner said. “How do you ever unwind that relationship?”
Rosner believes a failure to address the debt issue is part of a larger problem in which government officials have yet to map out an escape from GSE dominance to a housing market supported mostly by private capital.
“The GSEs are going to have to play a role for the next five to 10 years,” said Rosner. “We can come up with a million ways to address the private market and to get (private capital) back in. And we can agree or disagree on whether they (the GSEs) should exist in the future.”
However, he added, before those discussions can occur, there needs to be a public dialogue about what to do in regards to the $140 billion in public debt that lingers.
Acting Federal Housing Finance Agency director Ed DeMarco, on the other hand, expressed confidence this week in the eventual creation of a secondary mortgage market that can bring private capital back.
In a speech in front of the Exchequer Club in Washington D.C., DeMarco said, “The enterprises’ infrastructures are not the most effective when it comes to adapting to market changes, issuing securities that attract private capital, aggregating data, or lowering barriers to market entry. That is why we seeking to establish a framework that can support the secondary mortgage market post-conservatorship, with or without government involvement, and attract more private capital to the market.”
