"Reforming" Fannie and Freddie

When it comes to clinging to an outmoded paradigm in the face of public anger and all evidence to the contrary… Hosni Mubarak has nothing on the US Treasury. At least he had the good sense to step down.

For their part, the US Treasury is out this morning with a grand plan to “reform” Fannie Mae and Freddie Mac. Indeed, they plan to phase out the infamous government-sponsored enterprises (GSEs) and give the private sector a greater role in mortgage finance.

The problem at present is best captured in this chart:

Public vs. Privately Issued Mortgage Originations

Whether it’s Fannie, Freddie or federal agencies, Uncle Sam is the housing market…accounting for nine out of 10 mortgage originations in the past year.

When we forecast in 2004-2005 “the total destruction of the US housing market”, the suggestion was met with more than a snicker. Yet as this chart reveals…without government-sponsored activity, we were dead-on.

Now, Mr. Geithner and his minions are mulling over three options to wind down Fannie and Freddie over a period of 5-7 years. We’ll spare you the details, because the details are rendered more or less irrelevant by this passage in their 32-page report:

“Our commitment to ensuring Fannie Mae and Freddie Mac have sufficient capital to honor any guarantees issued now or in the future and meet any of their debt obligations remains unchanged. Ensuring these institutions have the financial capacity to meet their obligations is essential to continued stability, and the administration will not waver from its commitment.

“Given Fannie Mae and Freddie Mac’s current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery.”

Translation: The blank check the Treasury gave Fannie and Freddie (on Christmas Eve 2009, when no one was supposed to notice) remains in force. No one – certainly not the lenders who knowingly fobbed their crappy mortgage paper onto Fannie and Freddie – will be allowed to feel any pain.

Well, no one except taxpayers, who remain on the hook for $134 billion.

Addison Wiggin
for The Daily Reckoning