Ryan Budget Proposes an End to Fannie and Freddie

A recent Wall Street Journal article is titled "Ryan Budget Plan Promotes Housing Recovery by Ending Fannie Mae and Freddie Mac." The title of this story itself is filled with contradictions and I will tell you why.

First, without Fannie Mae and Freddie Mac the U.S. wouldn't have a housing market today. Together with the FHA, over 90% of all new mortgages have come through the Government Sponsored Entities (GSEs). Private market players have gone into hiding for over two years. Any proposal to fix the housing market by eliminating the GSEs should be a clear indication that the politician proposing it is backed by a big bank. The big banks are looking at the market and seeing a bottom. If they could only get rid of those low cost competitors, they feel they could make a ton of money again. That's why they want to eliminate the GSEs.

Second, the concept that this is considered a budget savings is a ridiculous notion. The fact of the matter is that taxpayers have been investing a lot of money in Fannie and Freddie. Popular opinion may be that the two companies will never return a dime to taxpayers. However, looking at other bailouts, we see the U.S. Government actually turning a profit. At this point, the best that could be said is that cutting off funding to Fannie and Freddie might save about $73 billion, after having spent twice that, but if this kills them off, you will never see a dime returned. Recently, during public hearings the Treasury has stated that the cost of the bailouts is dropping, especially after the GSEs have already announced fee increases for new mortgages. Keep in mind that the longer these two entities survive, the better the chance that they eventually send some money back to the Treasury.

The U.S. Government never intended to make the GSEs permanent monopolies in the market. If they did, they could instantly make them profitable by allowing them to grow their portfolios. They could have also loaned them money in a rate that was sustainable instead of the 10% dividend rate that is currently being charged. Banks that received TARP funding paid 5% on their borrowings. The 10% dividend rate is considered an incentive for the companies to reduce their portfolios and resolve bad loans quickly. That being said, it is an unfair rate to charge the companies over the long-term and must be reduced at some point.

All this time, the Federal Reserve has purchased over $1 trillion in mortgage securities to support the market. If the current plan were to maintain the GSEs as the primary source of mortgage funding, they could have allowed Fannie and Freddie to support the market by growing their portfolios by $1 trillion. This is exactly how Fannie Mae was used when it was created during the Great Depression. The fact that the Federal Reserve has taken on this role indicates that they don't want public shareholders to benefit from monetary policy. The Federal Reserve has made $72.465 billion dollars in interest on their GSE MBS and debt purchases. In another few years this will offset any remaining bailout costs (supporting link). This can be said because in the past few quarters, the amount of GSE borrowings from the Treasury has flattened out substantially and will eventually net zero, or a positive for the Treasury. In fact, in the Fall of 2010, the FHFA released a report that showed the substantial majority of borrowings for Freddie Mac to be complete.