Realty Check

Fannie and Freddie's Regulator on their Future


Acting FHFA director Edward Demarco seems, at face value, to be a quiet, intelligent, unassuming guy. He prefers to be called Ed, and this morning he did his first live television interview with me on CNBC.

But don't let the demeanor fool you.

Demarco was in the room one year ago when government regulators hauled the top brass of Fannie and Freddie in to introduce them to their new CEOs and their new way of life. He, in fact, was leading much of the discussion.

Was it the right thing to do? Demarco says:

"I think it clearly was. When we look at what we set forward at the time, we wanted to restore confidence in Fannie and Freddie. We wanted to enhance their ability to remain active participants in the U.S. mortgage market and we wanted to mitigate systemic risk; particularly with respect to these companies and their role in the U.S. mortgage market. Those were really critical steps that needed to be taken and I think that we have accomplished that objective."

Fannie Mae and Freddie Mac are not just active participants in the mortgage market, they are the mortgage market. Over a trillion dollars of government cash has made sure of that. Demarco estimates they operate about 3/4 of the market with FHA picking up the rest. So now they are even bigger giants, and as defaults rise, even on newer loans, their assets are not exactly improving.

Earlier this week the Mortgage Bankers Association floated its proposal for a government exit strategy. It included a good bank/bad bank scenario to rid the two of their bad assets, and then a metamorphosis of the two to smaller, privately held entities whose securities would be government backed.

Demarco was carefully savvy in his reaction to the proposal:

"I think the Mortgage Bankers Association have put forward a thoughtful proposal that ought to go into the mix that policymakers examine as they consider the future of Fannie and Freddie.

One of the things that was said at the time of conservatorship is that we need to deal with some immediate issues now.

But it also gives us some time to really think about the future of the secondary mortgage market in this country.

I think that that’s where as I think about it, that’s where I start my thought process is ultimately, the U.S. mortgage market’s a $12T market on the one hand, and it’s a market made up of millions of very small transactions on the other.

Secondary mortgage market is about how to connect those two. And the Mortgage Bankers Association has put forward a thoughtful proposal.

There are other proposals out there."

Okay, well I guess I couldn't exactly expect him to offer his own proposal.

I did, however, in talking with him, get the distinct feeling that he doesn't expect the federal government to shift away from buying mortgage-backed securities any time soon.

The plan initially was to spend $1.25 trillion through the end of this year.

Cutting off that liquidity to Fannie and Freddie with no clear plan for their future, would no doubt reverse the very fragile housing recovery currently underway.

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