April 17, 2013
Are Baby Steps Enough for Fannie and Freddie?
S&P issued a research report, The Implementation Of The FHFA’s Plan For Fannie Mae And Freddie Mac Still Has A Long Way To Go. The report addresses a number of recent events that will impact any reform program for the two Government-Sponsored Enterprises. S&P strike an optimistic note in the opening lines: “The U.S. government continues to gradually make progress on the reform of the” two Enterprises.” (1) It is unclear to me that we are actually making any progress at all. S&P seem to acknowledge as much a few paragraphs later: “Fannie and Freddie are perhaps more entrenched in the housing market today than ever before. Including Ginnie Mae, the government-related housing entities have combined to purchase or guarantee more than 90% of mortgages underwritten in the U.S. since the housing crisis, up from about 50% before the crisis.” (1)
S&P notes that Fannie and Freddie’s financial health is improving as they “are now generating earnings, which reduces the urgency to try to minimize taxpayer costs.” (1) Their underlying loans are also performing much better: “At Freddie, loans originated after 2008 account for 63% of its single-family guarantee portfolio and have a seriously delinquent rate of 0.39%, versus 9.56% for loans originated from 2005–2008. At Fannie, loans originated after 2008 account for 66% of its single-family guarantee portfolio and have a seriously delinquent rate of 0.35%, versus 9.92% for loans originated from 2005–2008.” (2)
S&P takes heart that change is afoot because of “the new key aspect of the FHFA’s plan to build a secondary market infrastructure is the proposed creation of a joint venture (JV) between Fannie and Freddie. This JV would have a CEO and chairman that are independent from Fannie and Freddie, and its physical location would also be separate. The GSEs would initially own, operate, and fund this unit, but the JV also would be able to eventually act as a common securitization platform for the entire market, instead of a proprietary platform. Furthermore, the ownership structure would be one that is easily sold or that policymakers can use in housing finance reform once Fannie and Freddie have less of a role in the market.” (2-3)
S&P characterizes the federal government’s approach as “taking baby steps.” (4) I would characterize it as just so much muddling about.
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