Sunday, December 04, 2016

Poor Gretchen on Fannie and Freddie

by Bill McBride on 12/04/2016 12:40:00 PM

My former co-blogger Tanta wrote several posts pointing out questionable reporting in articles by "poor Gretchen" Morgenson of the NY Times.  Tanta would have a field day with GM's article today: Trump Treasury May Mean Independence for Fannie and Freddie

With an apology to Tanta (who knew far more about the mortgage market than I ever will, and was a far better writer than me), here are a few comments on the article today.

Gretchen starts by quoting Steven Mnuchin, the nominee to run the Treasury Department for the next administration:

“We got to get Fannie and Freddie out of government ownership,” he told Fox Business. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”

Mr. Mnuchin is right.
We got to get Steve in an English class, but lets focus on the substance.

Is Mnuchin right? "It makes no sense that these are owned by the government" is a declarative statement without any backing. Perhaps Gretchen and Steve could study a little history. Fannie Mae was started in 1938 as a government agency to provide liquidity in the mortgage market. Over time Fannie was changed into a public-private organization, and finally into a private, for-profit, corporation with an implied government backing.

This privatization has been described as "privatizing profits, and socializing losses". If something made no sense, it was a structure that gave the profits to private investors, with the risks borne by the taxpayers.  It should be obvious to all that the original privatization was a mistake.

Instead of putting Fannie and Freddie into bankruptcy during the crisis - and wiping out the shareholders while putting a stranglehold on the housing market at exactly the wrong time - the government put Fannie and Freddie into conservatorship.   This kept the housing market on life support.  The taxpayers took all of the risk, and therefore the taxpayers deserve all of the profits.  That should be the end of that story.

Note: For the funny naming history of Fannie and Freddie, see Tanta's: On Maes and Macs

Back to Gretchen:
So what might happen now? In his comments, Mr. Mnuchin nodded to a crucial issue regarding Fannie and Freddie: safety and soundness. “We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again,” he said, “But we got to get them out of government control.”
Out of "government control"? Does me mean no government backing if they collapse again? Then what entity would provide liquidity during the next crunch? Or is Steve suggesting going back to privatizing profits (enriching the investors), and socializing the risks (all of of us taxpayers)?

What makes sense is for most of the mortgage market - most of the time - to be in the private sector, and for the government to provide liquidity during a credit crunch. We need government organizations operating all the time (hopefully as a small portion of the overall market), so that they can ramp up quickly during a crunch. But that doesn't appear to be what Steve is considering.