Plugging Into The Idea Of Fannie, Freddie As Utility Companies

Plugging Into The Idea Of Fannie, Freddie As Utility Companies

Stalled reform, never-ending conservatorship. There’s really only one path to get the GSEs out from under the government.

BY LEW SICHELMAN | CONTRIBUTING WRITER, NATIONAL MORTGAGE PROFESSIONAL

Prior to the housing meltdown and subsequent recession of 2008, it was hard to find anyone outside the real estate business who knew who Fannie Mae was. Most thought it was the popular (at the time) Illinois candy company, Fannie May.

But with the housing debacle, the semi-private secondary mortgage market reached the public consciousness. You knew that was the case when she became the butt of jokes by the late night comedy hosts. And soon, Fannie and cousin Freddie Mac were placed into conservatorship, lest they take the entire economy down with them.

Today, the two government sponsored enterprises, known affectionately within the business as “the agencies,” are thriving, earning millions upon millions. They’ve more than paid back what Uncle Sam put up to keep them afloat. Yet, though they are now extremely profitable, they remain under the government’s wing.

The hope once was that the Trump Administration would take the steps necessary to end the GSEs’ fiefdom. But that opportunity has come and gone. Apparently, the fact that the agencies’ profits were being swept into America’s general fund with hardly a blink or a wink was too much of a temptation for the White House to ignore.

But in the waning days of DJT’s rain – I know the word is spelled reign, but to me, it feels more like rain, a heavy rain – The Treasury Department and Fannie and Freddie’s regulator, the Federal Housing Finance Agency, decided GSEs could retain more of their earnings as important capital rather than passing them on to the Nation’s coffers.

The move, of course, denies the new Biden Administration the same privilege that DJT enjoyed, using the agencies’ earnings as it sees fit. And now it is left to the new President and his team to decide how to write an end -- the final chapter, if you will -- to an economic disruption that occurred a dozen years ago. Yep, that’s how long the GSEs have been in conservatorship.

REALTORS REAR UP

It’s anyone’s guess at this writing what Biden has in mind, if anything. Any number of ideas have been advanced. But one of the most intriguing – to turn Fannie Mae and Freddie Mac into public utilities – has been floated by the National Association of Realtors.

Now, you might ask, why does NAR has anything to say about this vital topic? For starters, its 1.4 million members have just as much interest in the mortgage market as lenders, mortgage brokers, title companies and the like. If not more so. After all, without the sales they generate, there would be no need for financing.

For another thing, NAR is the nation’s largest trade organization and one of the most powerful lobbies in Washington. So what it has to say is worthy of at least a look-see, if nothing else. And in a new, deeper dive that “fine tunes” the group’s on-going proposal to transform the agencies once and for all, Susan Wachter and Richard Cooperstein, argue that as utilities, Fannie and Freddie can continue their dual roles of utilizing private capital to protect taxpayers and fulfilling their charter mission to maintain mortgage market liquidity at all times and throughout the country, not just when the housing is strong and not just where it is strong.

The proposal, says Wachter, a professor of finance and real estate at the Wharton School, and Cooperstein, director of Alliances and Policy at Andrews Davidson & Co., is “the simplest and most durable way to lock down Fannie Mae and Freddie Mac in their current form as systematically important” to the mortgage sector.

“The subtle importance” of the utility idea is that it is not arguing for a new system, the authors maintain. Rather, they say the current system of utility-style market support which has been enjoyed for the last decade is tenable outside conservatorship if the right preconditions are met. “The best means to continue (their) critical roles, while protecting taxpayers, is to canonize their current role,” they maintain.

NO OTHER ROAD

One fan of the public utility model is Don Layton, the former Freddie Mac CEO who is now a senior fellow at the Joint Center for Housing Studies at Harvard University. “I’m definitely a utility model supporter,” Layton says. “I’m not seeing any other way.” Anything else is “too political,” he says, noting that “many alternative proposals” have been put forth but “none have come close, not even close, to happening.”

Wachter and Cooperstein’s bonafides are unimpeachable as Layton’s. She also is Director for the Wharton GeoSpatial Initiative and Lab, and the co-director of the Penn Institute for Urban Research. The economist also co-directs the Spatial Integration Laboratory for Urban Systems at the University of Pennsylvania. She has served on multiple for-profit and not-for-profit boards and currently serves on Fannie’s Affordable Housing Advisory Committee and the Treasury Department’s Office of Financial Research Advisory Committee. From 1998 to 2001 under now New York Gov. Andrew Cuomo, she served as Assistant Secretary for Policy Development and Research at the Department of Housing and Urban Development, and was the senior urban policy official and Principal Advisor to the Secretary.

Cooperstein has worked at the Office of Management and Budget, where he applied option pricing theory to value the financial guarantees of the federal government and was one of the architects of credit reform. He also spent a decade at Freddie Mac, where he rebuilt mortgage default and prepayment models and managed the bulk acquisition and subprime principal finance guarantee business. Also an economist, he has worked at Ocwen Financial and spent a year with Lew Ranieri, famously known as the father of mortgage securitization.

Together, they maintain that the agencies should operate like other public utilities. Much like power companies and water authorities, they say, the GSEs already compete for investors at a lower return than investors can land elsewhere while supporting the mortgage market during the good times and the bad, anywhere and everywhere in the country.

INVESTOR FAITH

Wachter and Cooperstein point out that not all investors seek growth stocks and the highest possible returns. Some, such as insurance companies and large retirement funds, want stability, above all else. They have a long-term view that matches up well to Fannie and Freddie’s secondary mortgage market mission of providing market support.

At the same time, the two semiprivate companies have a duty to protect taxpayers like you and me. And as the authors note, since the Great Recession, they have been reformed under FHFA’s guardianship to be safer and operate more like utilities. “They could not have helped the country out of the recession or during the pandemic if they were not structured this way,” Wachter and Cooperstein write. “Without them, rates would be higher in normal times, access would decline and the 30-year fixedrate mortgage would not be widely available.”

In their report, Wachter and Cooperstein also note that the enterprises are “extremely efficient, dealing in massive volumes, which makes their securities and credit risk transfers among the most liquid investments in the world.” Liquidity, of course, is something else mortgage investors cherish. So much so, the authors maintain, that they’ll accept lower returns, which, in turn, lowers borrowers’ costs.

There’s no question that the agencies have a wide footprint. But while they often are depicted as a duopoly, they have but a 50 percent share of the market, the two economists point out. There is plenty of competition for the other half from others which insure, guarantee or originate loans for their own portfolios or to sell investors. But for the GSE share, the barriers to entry are high, limiting the number of true competitors.

As Wachter and Cooperstein maintain, “utilities are a time-tested way to provide economic services in markets where pure competition does not work.”

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.