By John M.
"While Fannie Mae and Freddie Mac as corporate entities may not be needed, their exclusive function as dedicated investors is needed to create and maintain the United States secondary mortgage market."
When I started looking at Fannie Mae back around 2002 or 2003 it was usually described as America’s largest non-bank financial institution. Perhaps that’s true in some ways even now, but it and its sibling Freddie Mac are on life support under new regulator FHFA’s conservatorship. To get an idea how extreme things have gotten, consider that Fannie’s market cap is now a bit less than a quarter of Hasbro’s.
From when the Federal National Mortgage Association (FNMA) was founded by FDR in 1938 to when it was privatized in by LBJ 1968 (and subsequently given its quasi-competitor Freddie Mac in 1972 by Nixon) its guarantee on selected (mostly "conforming") American mortgage debt was backed by the full faith and credit of the Treasury. After 1968 this guarantee became implicit, but now that F&F have been ambiguously nationalized the strength of the guarantee is up in the air. What’s happening now, as it were, is an ongoing consolidation back onto Uncle Sam’s balance sheet of the off-balance-sheet deal FDR struck seventy years ago. Treasury doesn’t want to be responsible for all those bonds (it would approximately double America’s national debt) but alternatives to making the guarantee explicit aren’t obvious.
Bill Maloni’s recent post on the implications of Obama’s election includes some musings on how the new Administration might dispose of the GSEs, and Doom is happy to share his thoughts with our readers.
I hope that idea [in the original article Bill proposes forgiveness for some student loans - jm] fares better than my “Find a way to use Fannie and Freddie” to help with the Treasury’s not yet undertaken, “but I promise you soon to be,” massive mortgage backed security asset sales that the Treasury has promised us shortly will be forthcoming, once they give all of their Wall Street friends the jobs and opportunities to move those failed “private label” mortgage backed securities, meaning non-Fannie Mae and Freddie Mac securities.
In the meantime, Fannie and Freddie sit on their hands, waiting for Henry Paulson to state unequivocally if the former GSEs’ debt—as the Bush Administration advertised–is backed by the federal government, which should bring mortgage rates down, or is their debt “almost/nearly, a scosh/kinda/maybe” backed by the full faith and credit?
Confusion over this fact just makes the job tougher for everyone in the market.
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