Fmr. Ginnie Mae COO on Privatizing Fannie Mae & Freddie Mac: Congress Must Clarify Government Role

Privatizing Fannie Mae and Freddie Mac

• 💡 The plan to return Fannie Mae and Freddie Mac to the private sector raises concerns about juicing returns for shareholders potentially at the expense of mortgage market safety.
• ⚠️ A model similar to the lead-up to the financial crisis, where private sector risk-taking contributed to the demise of these companies, should be avoided.
• 🔑 If removed from conservatorship, guardrails and protections are needed to ensure the companies focus on their core mission and long-term returns.

Benefits and Mechanics of Privatization

• 🤔 The exact benefits of returning Fannie Mae and Freddie Mac to public trading are unclear without seeing the overall structure, as only presidential posts have been released.
• 🎯 Reform efforts have historically aimed to separate the government's role in ensuring mortgage-backed securities (MBS) liquidity from the risk-taking of private enterprises.
• 🏦 Comprehensive reform plans typically include a clear government backstop to provide liquidity, ensuring MBS holders do not bear the credit risk of the underlying companies.

Government Role and Market Impact

• 📊 The administration has not provided details on what the government would do with its stake, making it crucial to clarify when and under what circumstances the government would step in to allow the bond market to price certainty, not speculation.
• 📈 The explicit or implicit government backstop is critically important to the rates borrowers pay for their loans, as agency MBS trade tightly with treasuries.
• ⚠️ Without a clear government legal relationship, agency MBS may not be able to be held on bank balance sheets with low risk weighting, impacting capital requirements and foreign central bank purchases.

Clarity and Congressional Involvement

• ❓ It is unclear how the twin goals of spinning out Fannie Mae and Freddie Mac from conservatorship, absent clarity on the government's role, can be achieved without impacting mortgage rates for borrowers.
• 🏛️ The best way to clarify the government's role and provide a congressional stamp of approval is for Congress to get involved.
• 🌟 This clarity is exemplified by Ginnie Mae, which did not take losses during the financial crisis due to its clearly defined government backstop deep in the capital stack.
• 🛠️ Without congressional action, implementing a strong government preferred share purchase agreement and a Treasury backstop arrangement would be necessary but complex.