The EconomistSeptember 14th 2019 711“T
he lastunfinished business of the
financial crisis”: that is the rallying
cry of those seeking to reform Fannie Mae
and Freddie Mac, the two giant govern-
ment-sponsored enterprises (gses) that
back much of America’s mortgage industry.
In 2008, amid the wreckage of the housing
market, they were bailed out by the federal
government to the tune of $188bn and
placed in “conservatorship”, a form of gov-
ernment control. On September 5th Steven
Mnuchin, the treasury secretary, published
a long-awaited plan to reprivatise them.
“We want to make sure they are not in con-
servatorship on a permanent basis,” he told
the Senate on September 10th.
Mr Mnuchin set out two alternatives.
The first, more sweeping, would need con-
gressional approval. The second could be
carried out by the Treasury and the Federal
Housing Finance Agency (fhfa). Mr Mnu-
chin says passing reform through Congress
is his preferred option. A senior Treasury
official says administrative actions will
start promptly, in part to lay the ground-
work for legislation. But the administra-tion will proceed whether or not Congress
acts. The Trump administration is present-
ing America’s housing-finance industry
with a “fork in the road”, says Jim Parrott of
the Urban Institute, a think-tank.
The two gses have been central to Amer-
ica’s housing market for decades. Fannie
was founded as a government agency in
1938, during the Great Depression, and re-
chartered in 1968 with private capital and
shareholders. Freddie was set up by Con-
gress as a competitor in 1970. Both buy
mortgages, mainly from banks, add a guar-
antee to repay the principal and interest if
borrowers default, and bundle them into
securities. These they either retain on their
own balance-sheets or sell to investors.
Their guarantees transfer some credit
risk from the private sector to the govern-
ment. In the run-up to the financial crisis,
that transfer started to balloon. In the 1970s
Fannie and Freddie held less than 10% of
single-family mortgages in America. Now
they hold more than $5trn of housing-re-
lated securities and guarantees, nearly half
the total (see chart on next page).Politicians often say they want the gov-
ernment to get out of the mortgage busi-
ness entirely. But that is a distant prospect.
Taxpayers’ assumption of some of the cred-
it risk in mortgage lending is what drives
the mortgage-backed-securities market
(particularly since the financial crisis,
which devastated private-label issuance).
Investors are keen on the gses’ securities
because they isolate the interest-rate risk
associated with mortgages, allowing 30-
year fixed-rate loans, which are almost un-
known outside America. These are hugely
popular with consumers (and voters).
With exit politically untenable, the pri-
ority is cutting the pair down to size. Before
the bail-out they operated as private com-
panies with a public charter, implying that
the government would bail them out if they
ran into trouble. Rather than nationalising
them during the crisis, the Treasury guar-
anteed to keep their net worth above zero.
In return it took warrants representing
80% of their common stock.
The result is an even odder hybrid, with
private shareholders but government-run.
Under public control they have been forced
to hand the Treasury the bulk of their pro-
fits—and, since 2012, the lot—to repay the
bail-out. Since 2008 Fannie has returned
$181bn, and Freddie $120bn. Their capital
buffers have also been run down and hand-
ed to the government. Last year these fell so
low that both gses required an injection of
taxpayer cash. They now have just $3bn-
worth of capital apiece.Fannie Mae and Freddie MacHome truths
NEW YORK
Steven Mnuchin begins reforming America’s giant mortgage-guarantee firmsFinance & economics
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