Remember the 2008 Depression and the Taxpayer Bailout of Freddie Mac and Fannie Mae? I sure do! And so does President Trump! He has been mulling over ways to revamp the Government’s two mortgage giants, Freddie Mac and Fannie Mae. Obama punted this reform down the road but President Trump is determined to reform both companies and avert a future 2008 redux.
His dilemma is who to have spearhead this reform effort, the Treasury Department, Housing and Urban Development (HUD), or the Federal Housing Finance Agency (FHFA). The terms of the original Congressional charter for both companies mandates that they are regulated by the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA). The FHFA regulates the financial safety and soundness of Fannie Mae and Freddie Mac, including implementing, enforcing and monitoring their capital standards, and limiting the size of their mortgage investment portfolios; HUD is responsible for Fannie and Freddie’s general housing missions. The Treasury Department only has the task of providing liquidity for Freddie and Fannie by purchasing up to $2.25 billion in securities from each company.
Why do you care? Do you want to go through another 2008 Depression?
At the core of the issue is whether Freddie and Fannie should continue to have the tacit financial guarantee, (if they default you, the taxpayer, has to bail them out like the $200 billion bailout in 2008), of the Federal Government as GOVERNMENT-SPONSORED ENTERPRISES (GSE), or should they be “privatized” as Fannie Mae was in 1938 when it was created. By having GSE status, these two giants have basically eliminated all prior private secondary market competitors as Freddie and Fannie can fund bonds at a much lower rate than their private competitors. Investors in Freddie and Fannie know that the Federal Government totally backs them and thus the investment in the GSEs is risk free!
But, the downside is what we saw in 2008. Freddie and Fannie bought up worthless mortgages and consumer loans and drove up their debt to over $5 Trillion dollars, all of which was backed by taxpayers! There was not 100 other companies to spread this risk to as Freddie and Fannie had a monopoly. If there had not been a government backed Freddie and Fannie to buy up worthless paper, there probably would not have been a 2008 Crisis as the private companies would not have bought up worthless loans as they were responsible to stockholders who demand a return on their investments! Too Big To Fail would probably never had come about as there would have been no one to buy up idiotic loans by the big banks and mortgage brokers, thus they would not have created worthless loans in the first place.
So, what is the President to do? Treasury Secretary Steven Mnuchin wants to continue to head the reform effort but the soon to be head of the Federal Housing Finance Agency, Mark Calabria, would also like to take the lead as his agency has the basic Congressional charter to manage Freddie and Fannie. At the heart of the debate is whether to remove Freddie and Fannie from ” Federal receivership”, that was imposed on them in 2008 as a result of the mortgage crisis. They remain in Federal receivership, meaning total control by the Federal government today.
Steve Mnuchin, Treasury Secretary
Mnuchin favors the removal of the Federal receivership status from both GSEs and return them back to their 2008 status where they retain their tacit Federal Government backing. This would make the stockholders in Freddie and Fannie happy but keep the taxpayers at large on the hook if they repeat their idiotic business practices of the past decade. Mark Calabria, Head of Federal Housing Finance Agency Nominee
Calabria is a libertarian at heart and one could assume that he would not support continued government intervention or tacit backing for Freddie and Fannie. But that is just a guess as he has not signaled any reform preferences. Calabria, when he was at the Cato institute, expressed his displeasure at the agencies’ “Affordable Housing Mandate” that help fuel the sub-prime collapse. He has also questioned the need for 30-year mortgages and the need to package mortgage loans into bonds and then sell them to private investors.
But, The President appears to support Calabria as the lead in the reform effort. BUT, any reform has to be approved not only by the Senate Banking Committee but also the House Banking Committee, headed by MAXINE WATERS. Waters was one of the strongest supporters of sub-prime loans and the granting of insolvent loans to minorities just t drive up the home ownership numbers. She also was able to get her hubby placed on the board of directors of a Southern California bank!
So, keep an eye on Mark Calabria and where he signals the reform of Freddie and Fannie is heading. No matter what Mark recommends, the President will have to wait until after the 2020 elections where hopefully the Republicans will retake the House of Representatives, retain the Senate, and thus get Maxine Waters out of her role as head of the House Banking Committee. (AOL is also on this committee)
This Reform is Critical to the Continued, Non-Bubble Enhanced, Growth in Our Economy!