Facing Fannie Freddie Facts
The notorious GSE bailout will probably cause the US Federal debt to be considerably lower than it would have been without the bailout. It could cause the US Federal debt to be much lower than it would have been, but that won’t be allowed to happen.
Fannie and Freddie are now profitable. They are likely to pay their debts to the Treasury which would imply that the bailout will reduce the Federal debt, because they pay the Treasury much higher interest rates than the Treasury pays anyone, because they have also paid dividends, because Fannie and Freddie will pay corporate income tax (eventually) and because even after the debt to the Treasury is repaid, the Treasury will own 80% of the equity of Fannie and Freddie.
Sorry for the out of date link to a low brow paper but here’s Rick Newman at USA Today three months and 23 days before today
It’s now possible to foresee the point at which the two agencies will pay back all the taxpayer money they required. Moody’s Analytics estimates that on their current course, Fannie and Freddie will return everything they owe by 2019. The break-even date could occur much sooner—perhaps just a couple of years from now—if the agencies are permitted to claim a tax break allowing them to deduct some portion of past losses.
So, if this happens, how much will the Treasury be ahead on the deal ? It really depends on how much 80% of the shares of Fannie and Freddie are worth to the Treasury. It could just keep collecting 87% of profits (the 7% because it doesn’t have to dodge paying taxes to itself if it doesn’t want to). Fannie plus Freddie profits were $ 28 Billion in 2012. If that grows at the rate of inflation about $ 24 billion 2013 dollars a year to the Treasury once they have used up their tax loss carryforward. Discounted at the Treasury rate (as it should be) that’s worth hmm carry the one, about well, a lot more than $ 720 billion.
But, of course I’m dreaming. There is no chance that the Federal government will keep it’s shares of Fannie and Freddie — that would be socialism. They will certainly be reprivatized. That should generate more than 360 billion. By “should” I mean “won’t” as the deal will be crooked, but it would still be a lot of money. Except that that would still be socialism because Fannie and Freddie are too big to fail.
True to it’s rep, USA Today prints a deeply dumb analysis stenographing conventional wisdom which is plainly absurd.
With Fannie and Freddie back on track, the pressure to wind them down or reform the whole housing-finance system may ease. But most experts think major changes are still needed—most importantly, reviving the private-sector market for mortgage-backed securities. The problem with having the government perform that role is that political pressure could generate bad lending incentives—such as the affordable housing mandate that caused some of Fannie and Freddie’s problems—and that government agencies could distort free-market dynamics. Several proposals—including one from the Obama’ administration—call for a hybrid model in which government agencies serve a few particular needs while private-market lenders handle the bulk of mainstream loans.
With all due respect* for “most experts” WTF
It appears that “most experts” agree that Fannie and Freddie suffered from “bad lending incentives” but Countywide didn’t ? The “private-sector market” for mortgage-backed securities almost destroyed the world economy and yet the Obama administration is convinced that they should be revived ? This is insane. It is as if Obama decided that the evidence shows that Medicare advantage is the way to reduce health care spending (that insane view is also heard in Washington, but I expect Paul Ryan to be insane).
The article of blind faith held in spite of overwhelming evidence that it is nonsense, is that Government involvement in high finance “distorts” something which is not distorted if left to its own devices.
What conceivable evidence could possibly convince “most experts” that this is total nonsense on the order of denying global warming and evolution ? I ask for information (please try to think of something and type it in comments — second comings of Christ are allowed). I can’t imagine any stronger evidence and yet “most experts” faith in free-market dynamics is untouched.
*in this case, all due respect is zero respect.
1) If I’m not mistaken Countrywide is no longer with us – Fanni and Freddi are. (I would like to see them disappear). 2) Stop hyper-ventilating – it really is not very convincing; 3) If you really want to see GSE’s in action you should come visit me – here we have lots of them and it’s not a pretty picture. 4) and yes, I remain one of the deluded whose faith in “free markets (and free people) remain untouched.”
1> Snark != argument 2> Style criticism != argument 3> Not sure what this is but it doesn’t resemble and argument 4> Explains much.
Thanks for playing!
So housing price deflation and defaults can never happen again? Well one can suppose as long as there is endless credit supplied by, you guessed it, the GSE’s.
What’s wrong with this picture? Well setting aside little issues like markets, actual markets with risk and such, nothing I suppose.
A. Socialist: Let me try to explain 3>: I live in Qingdao, which is a city in China, which contains a lot of GSEs. All are heavily subsidized, amost all lose money
Super! Congratulations. Still doesn’t make the comment relevant or useful. As the post makes clear, Fannie and Freddie are making money. I think I understand that all you really wanted to say was 4>
Good luck with the mainstream delusion, such as it is. It appears to be losing credibility everywhere. But maybe not China I really can’t say.
Let’s think about who would take up the GSE business. Say banks like Bank of America. BoA is effectively a GSE. Remember, Fannie & Freddie had no explicit guarantee of their debt by the feds. Do you think if BoA were to approach bankruptcy, there would be no federal involvement? Treasury involvement in GSE activity now also serves other purposes. People like to talk about how Obama would push GSE’s to weaken their standards, but what has happened the last 4 years? Anyone get a mortgage during that time and think it was easier than the 10 years prior? The GSEs are not a problem today and do not appear to be a problem anytime soon. Nothing is stopping private lenders from ‘reviving’ themselves. One easy way to reduce GSE business is to just lower the conforming limit, starting with eliminating the geographic special limits. Why hasn’t that been proposed?
China only thinks markets are free. One day someone else will begin to exploit them, and they will find out there is a cost. And they will. Then they will find out markets aren’t free at all .
Oh, and the GSE’s were really late to this. They were bad, muddy even, but the pit we fell into was dug by private capital.
*Note: That is different from the hole that people who want to blame this on GSE’s have their head stuck in…
If you aren’t so far gone by the infection of The Big Lie, or just care about reality, read this, and think about what happens when we hand it back to the donors that helped O get elected, the criminals formerly known as banks…
http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/
I also think that banks prefer having the GSEs around to assume the long-tail risk. They make a lot originating mortgages, and that money is up-front. The money the GSEs make is taking a small slice of the interest payments in exchange for bearing lots of default and interest rate risk. Working with the GSEs is just playing by the rules (not that the rules completely make sense) and the big boys excel at that.
You’ll also get higher rates w/o the GSEs, which will push the politically active Realtor and construction trades communities into a froth. They tend to have the ear of many in the House, and when push comes to shove, free market ideology will lose to the donors in the home district.
http://www.nytimes.com/2013/08/07/business/washington-edges-warily-into-housing.html?src=me&_r=0
Fannie and Freddie are profitable today because they’ve re-kindled a new housing bubble, using the same tactics they used before the implosion of the last housing bubble.
Eventually, the American people will have to pay the piper for such wizardry.
And why have Fannie and Freddie gone back to the same toxic well?
Why, to give the illusion of a recovering housing market & a recovering economy.
But only those that believe in the Wizard & live in the Land of Oz should buy into that.
The root cause of the housing crash were (in order of importance): (1) loosened lending standards by the GSE’s, (2) loose monetary policy by the Fed.
If #1 had not happened, there would have been no bubble, or a very much smaller and less pervasive one. If neither #1 or #2 had happened there would have been no bubble at all.
It seems to me that the govt was very much involved in both #1 and #2. So I think your post is way off the mark.
PartlyCloudy,
The Community Reinvestment Act of 1977 was the tool that minorities used to force the banks to reduce their lending standards. And once banks reduced their lending standards, it was Katie bar the door.
Plus, the banks discovered they could make risky loans to unqualified buyers & then lay the risk off to Fannie & Freddie (and later to Wall Street). After that, banks were willing to lend to practically anyone that had a pulse.
Fannie & Freddie were the chief culprits in the 2008 housing meltdown & they’re back at it again, with the federal government guaranteeing about 87 percent of all new mortgage loans now being made.
Zekester – read the link that Partly Cloudy left in his comment. you’re just wrong.
Mittymo – you too.
I can reference links too:
http://online.wsj.com/article/SB10001424053111903927204576574433454435452.html
GSE’s radically relaxed underwriting standards … that set the ball rolling.
Ritholz is like krugman – rarely correct. Don’t know what drives their prejudice, but they are smart idiots.