US seeks to privatize mortgage giants a decade after market meltdown

WASHINGTON, Sept 10, 2019 (BSS/AFP) – A decade after the mortgage bubble burst sparking the Great Recession, President Donald Trump wants to privatize two financial linchpins of the multi-trillion-dollar American housing sector.

In Senate testimony on Tuesday, US Treasury Secretary Steven Mnuchin is due to lay out a plan for the reform of American housing finance, including the government-sponsored enterprises known as Fannie Mae and Freddie Mac.

The two organizations — which together back more than half of all US
residential mortgages — were placed under conservatorship, or effectively
nationalized, during the mortgage meltdown of 2008.

A $190 billion government bailout that year saved the two entities as
defaults by risky so-called sub-prime borrowers soared nationwide.

Little understood by the general public, the two institutions do not in
fact originate mortgages.

Rather, they pump liquidity into the housing sector by buying mortgages
from banks and then packaging them as securities which they can either keep or sell onward to investors with an implicit guarantee.

This system eases the financing of long-term lending such as 30-year
mortgages, which are rare outside the United States but have been key to
achieving the “American dream” of homeownership.

At the moment of the housing market’s collapse, the home ownership rate had hit 70 percent before tumbling as foreclosures swept the nation.

In a report last week, the US Treasury laid the groundwork for reforms to
the two institutions, long a policy goal of the Trump administration.

Even though Fannie Mae and Freddie Mac are hybrid bodies traded on Wall
Street, because of the conservatorship, their dividends are paid into the
Treasury — something private investors would love to change.

– A capital cushion –

As the real estate market has recovered and grown stronger in recent years,
Fannie Mae and Freddie Mac — whose familiar names arise out the
abbreviations for Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC) — have sent their robust profits straight into to government’s coffers.

In all, since the federal takeover, they have sent $300 billion to
taxpayers, more than repaying the cost of their bailout.

The Mnuchin reform plan involves dozens of proposed legislative and
regulatory measures and aims first of all to recapitalize both organizations
by allowing them to keep some of their profits.

This should create a capital cushion to protect them in event of another
mortgage catastrophe.

In effect, the Treasury wants to end the tacit government guarantee —
which more or less required the original bailout — and instead plans to
create a guarantee that is both explicit and already paid for, which will
apply to some mortgage bonds.

Mnuchin said Monday he hoped to win the support of Congress in the “next
three to six months.” Failing this, he may move “on the administrative
front,” he said.

According to Mnuchin, a reformed federal housing finance system will also
boost economic growth.

Once a Goldman Sachs executive, Mnuchin is also a former mortgage banker, having taken over the California bank IndyWest, renamed OneWest, during the crisis.

The release of the housing finance reform plan comes as shareholders’ begin to make progress a legal battle to stop the governments’ collection of Fannie Mae and Freddie Mac profits.

A federal appeals court last week reversed a lower court finding which had
supported the government policy.