The Long Goodbye

Are Fannie and Freddie headed for an exit?

If there were two players central to the Financial Crisis, they were Fannie Mae and Freddie Mac, the public-private mortgage giants who had hundreds of billions in sub-prime mortgages on their balance sheets and needed hundreds of billions in Federal bailouts to avoid bankruptcy. They’ve paid that money back to the Federal Government, and lawmakers are debating what to do with them now.

The Senate Banking Committee has come up with a plan to wind them down and replace them with a new government reinsurer called the Federal Mortgage Insurance Corp, which would only guarantee the mortgage after private creditors take a hit. There would also be a mutual cooperative mortgage lender, jointly owned by small banks.

Some investors want to go back to the status quo before the crisis, before Fannie and Freddie were taken over by the Government. After all, they reason: the mortgage giants have paid back their capital infusion. Why shouldn’t they just go back to being a public-private partnership? Others think that they are too profitable to privatize—the government needs the money, and Fannie and Freddie earned $130 billion last year. Still others want to buy them from the Government.

What’s next? Whatever happens, it will happen slowly. These companies are central to the financial landscape. They own or guarantee 60% of all US home loans. Their bonds are in the portfolios of pensions, municipalities, banks, mutual funds, endowments, corporations, foundations—you name it. Just about everyone has a stake in what happens. And there’s no crisis right now forcing a change. Just because they have a stick doesn’t mean Congress wants to whack the nearest bee’s nest with it.

First they were too big to fail, now they’re too profitable to privatize. The mortgage giants are a giant mess!

Douglas R. Tengdin, CFA

Chief Investment Officer

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