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What is up with the GSEs? Part II


Continuing our discussion from yesterday about the two government sponsored entities that support the housing mortgage markets known as Fannie and Freddie.

Let us be a little more formal about names than we yet have been.  "Fannie [Mae]" is a common nickname derived from the name "Federal National Mortgage Association" founded in 1938. "Freddie [Mac]" is the corresponding brotherly name coming from the "Federal Home Loan Mortgage Association" founded in 1970. 

The word "Federal" in each case indicates some connection to the US government, as does the word "sponsored" from "Government Sponsored Entities" when they are called the GSE siblings. The connection to the US Treasury has always been at least implicit -- they were considered too big to fail, so as a matter of psychology anyway their securitizations of mortgages were and are in greater demand than non-sponsored competitors' securitizations. 

At any rate, this implicit connection at which the nomenclature hints became explicit in 2008 when the GSE's did fail, were deemed too big to fail, and were put into a government conservatorship. 

As to how things will play out from here, given the Trump administration's apparent inclinations, I think we can safely make three points:

1) It will take some time.  This is not a priority for the administration in general or for Treasury Secretary Bessent in particular and there are a lot of moving parts -- nothing dramatic will happen before next summer.

2) None of the sort of re-jiggering under discussion -- the end of the conservatorship, the re-opening of the GSEs to the capital markets, the higher costs they will be encouraged to charge to mortgage issuers -- none of it will change the psychological fact that the market regards them as too big for the Treasury to allow them to fail. The events of 2008 and since have only confirmed that. 

3) Here is a neat ironic bit I like talking about, as an ex [but not very repentant] anarcho-capitalist. If the footprint of the GSEs in the mortgage market should be significantly, even drastically, reduced some other structures will come in to replace it functionally, perhaps after a period of chaotic transition. Among the most plausible replacements?  The sovereign wealth funds (SWFs) of other nations.  In other words, one sovereign's withdrawal would simply create a vacuum that other sovereigns would fill. 

It would not be an entirely new thing for foreign SWFs to move in, in this way. In 2018, after all, the Singaporean sovereign wealth fund GIC allied itself with the Canada Pension Plan Investment Board (CPPIB) and Scion Group to acquire a US student housing portfolio worth $1.1 billion. 

That amount is but a grain of sand in the hourglass of US home mortgage market, so CPPIB, GIC, and others who have made such move would have to be ready to scale up in a big way.

Here's the thing: they probably are.

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