US seeks to privatize mortgage giants a decade after market meltdown

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WASHINGTON, Sept 11, 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 laid
out the administration’s reform plans for housing finance, including the
government-sponsored enterprises known as Fannie Mae and Freddie Mac.

“In their current form, Fannie and Freddie are still too big to fail,”
Mnuchin told lawmakers, saying their size and importance created liabilities
for the financial system that could require another unpopular taxpayer
bailout.

The two organizations — which together back about 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 that 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.

Also testifying Tuesday, Mark Calabria, director of the Federal Housing
Finance Agency, said a 25 percent decline in the housing market would cause
$43 billion in losses for the financial institutions.

“In their current financial condition, the enterprises are not equipped to
withstand a downturn in the housing market,” he said.

The two are allowed just $6 billion in capital reserves despite owning or
guaranteeing nearly $6 trillion in mortgages, he said.

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 the 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 the event of
another mortgage catastrophe, officials believe.

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.

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 in a legal battle to stop the government’s collection of
Fannie Mae and Freddie Mac profits.

A federal appeals court last week overturned a lower court finding which
had supported the government policy — something Mnuchin told CNBC on Tuesday
the administration could appeal to the Supreme Court.

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