The new Treasury Secretary nominee, Stephen Mnuchin (who has no doubt suffered since his crib as “Munchkin”) wasted no time at all to announce the end of Fannie Mae and Freddie MAC (government-sponsored enterprises, the “GSEs”).
Mnuchin asserted that the GSEs have been “displacing private lending in the mortgage market.” The GSEs will be ”moved out of government control,” and “…we’ll make sure that when they’re restructured, they’re absolutely safe.”
Donald Trump’s election and the single-party control of the White House and Congress means the end to a long period of gridlock and to a solid 16-year period of ineptitude and inaction by Treasury Secretaries.
Previously impossible actions will happen, some quickly — some good, and some not.
The lurch out of gridlock
The risk to the economy — and in this case specifically to housing — will be the nature of the lurch out of gridlock.
The greatest hazard is not Trump himself, nor anything about him, and the hazard would be just as great if the Democrats suddenly gained control; the hazard is enactment of looney-fringe economic theology.
The right side of politics distrusts or hates outright nearly any aspect of government. Yet both political wings were fans of the GSEs in the years 1980 through 2005, when the GSEs departed their charters and became bloated investment companies — popular among politicians so long as they were good for profits and big contributions to campaigns.
Once the GSEs became entangled in the Bubble, they were pariahs, untouchables. They had to be taken over in 2008 by the Treasury (conservatorship), collapse unthinkable.
Since then, many inventive proposals have floated by, none within miles of maintaining a steady supply of cheap mortgage credit.
One other political player: Banks have always hated the GSEs, unable to compete.
Mnuchin is with them — the signal is that line about displacing private lending. The bankers’ solution to the competition problem: Kill the GSEs and add 1 or 2 percent to mortgage rates, all to benefit bankers.
Will the market be a better steward than the government?
I am a fan of markets. We should trust markets whenever we can.
But once in a while, government can do things better than markets. The United States Marine Corps. Social Security. The FBI.
Look what the free market for drug manufacturing has done to prices. Private competition can result in cartels or anti-competition.
Here are the benefits of the GSEs, so large that they should remain under a government umbrella and with some form of guarantee.
1. Uniform underwriting. All of us in the lending business know GSE-file approval outcomes cold, in the very first client meeting. So do many Realtors and consumers.
The jumbo mortgage market is privatized now, healthy securitization ended in 2007 — and underwriting is widely different from each wholesaler. It’s unpredictable, capricious and changes constantly.
2. Cheap. GSE loans are cheap for more than one reason, but the first is volume of uniform MBSs (mortgage-backed securities).
We have a $6 trillion global market in GSE MBS, all MBS the same. That means liquid — any investor any day can find a liquid market, easy to buy or to sell.
Go back to private-label MBSs, no two the same — those are very expensive to trade, the expense passed on to the consumer.
3. Cheap because of government guarantee.
So, what risk to taxpayers for the guarantee?
Under post-bubble underwriting, GSE loan defaults since 2011 are running at about 10 percent of the levels in the 1970s through 1990s, pre-bubble. In some ways too low, credit too tight.
Also, the risk that required takeover in 2008 is winding down — that was the practice of owning and financing $1.5 trillion in loans.
The GSEs’ proper duty is to operate as guarantors for fee — insurance companies, not giant investors. Yes, the taxpayer will bear some risk in a bad recession, but the taxpayer is the beneficiary of low rates.
However, it is a little early to declare GSEs requiescat in pace. The right has been gunning for the GSEs for a long time and not hit a thing.
There will be a fight.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
