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What is up with the GSEs? Part I

 


What is up with Fannie Mae and Freddie Mac? Let's not be afraid to get a little wonky. 

These are the two "government sponsored entities" (GSEs) that between them backstop much of the home mortgage business in the United States. They don't issue mortgages: in essence they play mortgages as a secondary market. 

That doesn't mean they are unimportant.  Rather, it means that institutions that do issue mortgages depend on the presence of Fannie and Freddie as a risk mitigator. Better than keeping the whole of the risk of every home on their own books!  

The history is important as we contemplate the Trump II administration's plans for the GSEs. But I won't go through the whole history of the two of them, which would of necessity begin in the New Deal and then spend a fair amount of time with Richard Nixon. I will do neither. 

I will, though, say something about the crisis of 2008. Then in tomorrow's entry I will speak to 2025's reform impetus.

At any rate: in August 2008 it became obvious that the siblings didn't have the capital to continue. The market expected the Treasury to 'do something,' after all, the GSE's were too big to fail. 

Secretary of the Treasury Henry Paulson, though, said in August 2008 amidst the unfolding crisis that there would be no one-time infusion of cash. If the GSEs needed an infusion, they would have to come under the operational control of the US Treasury.        

On Saturday, September 6th, Rep. Barney Frank (D-MA), a big booster of every-family-must-own-a-home ideology, was thinking happy thoughts to keep the shadows away.  WaPo quoted him saying, "There's no immediate crisis. It's not like they're going to run out of money tomorrow or Monday."

There was a crisis, though, and on the following day, so as not to wait for the work week to test Frank's whistling, the Federal Housing Finance Agency (FHFA) put both the agencies in conservatorship. They're still there.

There is no movement underway of any visibility or significance to abolish Fannie or Freddy.  But what President Trump and acolytes seem to be preparing to do is to re-privatize the siblings, letting them out of conservatorship, off the federal government's balance sheet, and letting them re-capitalize (sell shares).  They would likely to so on terms that would reduce the sisters' over-all "footprint," for example by requiring that each charge higher fees to the mortgage issuers than had been the case.  This in turn might result in some lending staying on the issuer/banks own balance sheets or getting it taken up by non-sponsored entities.  

More thoughts on how this might play out tomorrow.       

PS.  My wish with regard to the northern Virginia special election held yesterday was granted. Yippee! 

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