So Much for ‘Reform’ At Fannie and Freddie

WORD out of Washington is that the Trump administration finally is going to reform Fannie Mae and Freddie Mac. The bad news: What’s being contemplated right now isn’t a reform but a replica of the policies that abetted one of the most catastrophic financial disasters in history. Congress created Fannie and Freddie decades ago to promote home ownership for the middle class by buying mortgages from banks, packaging them into securities and off-loading the risk to investors.

The thinking ran like this: Since banks didn’t like to make 30-year fixed-rate loans to most people — the risk of default and the vicissitudes of interest rates over such a long period of time make it a lousy business — the heavy hand of the federal government was needed.

Thus Fannie and Freddie would sell government-backed bonds at low rates, use the proceeds to snap up mortgages from banks, then package them into (allegedly) less risky bonds sold to investors for a profit. They called it “securitization.”

That was the idea; reality turned out to be different. Over the years, Fannie and Freddie became public companies — odd, since they were created by acts of Congress and backed by the federal government.

Their stocks soared with the boom in housing prices — a boom the two agencies goosed by making it possible for ever more people to buy homes, even those who really couldn’t afford the payments. As long as the housing bubble grew, through the 2000s, Fannie’s and Freddie’s profits papered over accounting scandals and huge salaries handed out to the quasi-bureaucrats who ran the show.

Then came the implosion, beginning in 2007. Default rates shot up, while Fannie and Freddie began to announce huge losses. By 2008, just before the wider banking col-- lapse, Fannie and Freddie were heading for insolvency. The feds spent a whopping $200 billion in taxpayer money to prevent their collapse and placed them into something called conservatorship.

Fannie and Freddie have been forced to do their thing as direct arms of the government ever since.

The Trump administration entered office determined to change this state of affairs. Almost from Day One, Treasury Secretary Steve Mnuchin, a former Goldman Sachs mortgage banker, touted a free-market alternative to Fannie and Freddie to take the government out of the mortgage business — and prevent taxpayers from getting screwed again. Exactly what he meant by that was anyone’s guess.

The timing is right. Fannie and Freddie are making money again and have more than paid back what they received in bailouts. So at least on paper, they are ready to be set free from the government. The appointment of Mark Calabria, formerly an economist with the freemarket Cato Institute, to run the agencies looked like an auspicious step in the right direction.

Calabria has questioned the necessity of Fannie and Freddie. He has also wondered out loud why the 30-year mortgage should be preserved if there isn’t really a private business capable of making money at it without government backing. And he has pointed out how, in places like Canada, there is far less securitization of mortgages and higher rates of homeownership. So what’s the problem? Calabria has been singing a different tune during his Senate confirmation hearings. “It is indeed possible for us to have a well-capitalized, strong system that preserves the 30year mortgage,” he told lawmakers last week. He added: “I want to very clearly state to this committee that, if confirmed, my role . . . is to carry out the clear intent of Congress, not to impose my own vision.”

He didn’t appear to specifically address whether the government should get out of the mortgage business. Nor did he seem to mention that the only reason Fannie and Freddie make money is because taxpayers subsidize their borrowing. The vision he promoted was more of the same.

Meanwhile, liberals like Maxine Waters, who now chairs the House Financial Services Committee, still want Fannie and Freddie to insure risky mortgages, which is bound to create another bubble like the one that exploded in the 2008.

There are also powerful financial forces looking to cash in on Fannie and Freddie’s next stage. Hedge funds have scooped up the stocks of these outfits on the cheap with the hope that the government ends its conservatorship and returns the profits to shareholders.

Everyone has a say in the future of Fannie and Freddie — except, so far, the taxpayer.

Dems still want the agencies to insure risky ’ mortgages, bound to create another bubble.