The administration’s plan for overhauling Fannie Mae (FNMA) and Freddie Mac (FMCC) was widely anticipated as part of or alongside this February’s budget proposal for the upcoming fiscal year. The budget for fiscal year 2011 was presented on schedule, but it did not include a formal road map for the government-sponsored enterprises. It now appears that uncertainties relating to the long-term role of Fannie Mae and Freddie Mac, operating under the conservatorship authority of the Federal Housing Finance Administration since September 2008, will extend into next year.
Speaking before the House Budget Committee last Wednesday, Treasury Secretary Tim Geithner made no mention of Fannie Mae and Freddie Mac in his prepared comments. During the question and answer period, however, he suggested that the presentation of a formal plan was not an immediate priority. Instead, the secretary offered that “we want to make sure that we are proposing these changes at a time when we have a little bit more distance from the worst housing crisis in generations.”
In his semi-annual monetary policy report to Congress (the “Humphrey-Hawkins” report mandated under the Full Employment Act of 1978) last Wednesday, Fed Chairman Ben Bernanke reiterated the steps taken to stabilize the housing market. The housing crisis and the Fed’s efforts to combat it have been comparable in scale, with the latter purchasing $1.25 trillion in agency mortgage-backed securities and $175 billion in agency debt. While those purchases are set to conclude in March, a sharp rise in mortgage interests rates will almost certainly draw the Fed back into its stabilizing role.
While the Fed may anticipate taking steps back from securities purchases, the agencies remain tools of policy. When asked by the Senate Committee about Fannie Mae and Freddie Mac’s ultimate relationship to the government, Mr. Bernanke stated that conservatorship “… is not a sustainable situation, and I think it is very important that we move toward clarifying the longer-term status.” Mr. Bernanke was presented with similar questions from the House, where he stated that “the sooner you get some clarity about where the ultimate objective is, the better. Of course, you don’t necessarily have to get there by the end of the year.”
Given the continuing fragility of the housing market, it is not unreasonable that the administration wants to proceed deliberately in charting the enterprises’ futures. Any changes to their structure, or a decision to maintain the status quo over the long term, will have fundamental implications for the nation’s economy and housing markets. In the here and now, the administration’s attention is focused elsewhere. Apart from the health of that housing market, the health care debate itself continues to drain energy and attention in spite of an original timetable that would have seen the issue settled months ago. And while the fate of Fannie Mae and Freddie Mac may be overshadowed by the health care debate, its significance-as a political and policy issue-precludes its moving too far off of the agenda.
JUST THE DAY BEFORE Secretary Geithner’s House appearance, Congressman Scott Garrett of New Jersey, along with his fellow Republicans, unveiled the Accurate Accounting of Fannie Mae and Freddie Mac Act. The proposed act would require the Office of Management and Budget to bring the enterprises “on budget,” accounting for their operations on the government’s balance sheet. Speaking to the possibility of a change in accounting for the public obligation, the secretary added that “we do not believe it’s necessary to consolidate the full obligations of those entities onto the balance sheet of the federal government at this stage.”
While the administration may seek to maintain a separate accounting for Fannie Mae and Freddie Mac, the costs of conservatorship continue to rise. As I described in a column last September, the losses reported by the enterprises since conservatorship have been prodigious. On account of their net-worth deficits, both Fannie and Freddie have received billions of dollars in funds from the Treasury to avoid mandatory receiverships. Through the end of last year, Fannie Mae had received $59.9 billion in public support in the form of senior preferred share investments. Freddie Mac had received $50.7 billion.
After reporting a net loss of $16.3 billion for the fourth quarter of 2009, Fannie Mae will reportedly seek another $15.3 billion to offset its current net-worth deficit. Under the terms of the public investment, Fannie will then be required to make annualized dividend payments of $7.6 billion. But as Fannie described in its filing last Friday with the Securities and Exchange Commission, “this amount exceeds our reported annual net income for all but one of the last eight years, in most cases by a significant margin.”
For the immediate future-and for some time after that-the housing market will remain critically dependent upon Fannie and Freddie’s support. Similarly, it is evident that the enterprises are critically dependent upon public support in remaining solvent. While most policy makers and private market participants will agree that the temporary symbiosis is necessary, some now argue that the government’s current level of intervention should be entrenched. Among them, The Wall Street Journal reported last week that the National Association of Realtors has circulated a proposal for institutionalizing a federally owned, nonprofit structure for the enterprises.
Writing for The Journal, Nick Timiraos points out that “the proposal from the National Association of Realtors is likely to meet stiff political resistance,” principally on account of the cost of the conservatorship to date and political pressure in support of change.
And well it should. While the government has an important role to play in regulating the market and in ensuring that underserved but creditworthy households have access to mortgage financing, the argument for broader, long-term government involvement is tenuous at best. There is ample evidence, both in the domestic market and from other industrialized nations, that a well-functioning private market can and will provide credit for the majority of single-family home buyers at interest rates that correctly reflect banks’ cost of capital and borrower risk. Once the housing market is returned to health, and as a fundamental tenet of economics, the onus for demonstrating that a public institution should crowd out private activity absent clearly demonstrable market failures should rest with the proponents of such a plan.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.
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