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Thursday, 02 October 2014

Frantastic

Treasury's Frannie fix puts Congress on the spot

The U.S. Treasury has put Congress on the spot over the future of housing finance. On Friday Team Geithner unveiled some bold moves to speed up winding down Fannie Mae and Freddie Mac. Now it’s up to the nation’s lawmakers to figure out what will replace the troublesome twins.

Treasury is ending the onerous 10 percent annual dividend the two mortgage agencies have to pay on the $188 billion they borrowed from taxpayers. That payout had created a bizarre feedback loop which forced them, until recently, to borrow even more money from the Treasury to pay their annual tithe.

Instead, the companies will hand over all their profit to Uncle Sam. At present, that means extra cash for the nation’s coffers: both earned more than what they owed for the dividend in the second quarter but kept the extra. The new agreement also removes the temptation for the two lenders to use any unreturned profit to grow their business or overpay their staff.

Treasury has also ordered the agencies to shrink their $1.3 trillion investment portfolios by 15 percent annually, up from 10 percent. That means they should hit the $250 billion target by 2018, four years early. Freddie already slimmed its portfolio at the new rate over the past year.

This still leaves the dilemma of how to reform the dysfunctional U.S. housing finance system. The Obama administration put forth some suggestions over a year ago, but lawmakers have done little since. Even the most crucial of questions remains unanswered: should the government guarantee home loans at all?

It must be tempting to do nothing: Fannie’s and Freddie’s earnings go straight into the general fund for a cash-strapped Congress to spend. But just letting the agencies shrink is not an answer. They account for more than 60 percent of all home loans made in the past few years. Banks do not have the balance-sheet capacity to fill the gap and investors prefer buying federally guaranteed mortgages.

Saying goodbye to potential revenue is never easy. It is especially difficult in the middle of a budget war. But keeping the Franken-Frannie monster alive is no solution.

Context News

The U.S. Treasury and Federal Housing Finance Agency announced on Aug. 17 plans to accelerate winding down Fannie Mae and Freddie Mac.

The two government-controlled housing finance agencies will give all their quarterly profit directly to the U.S. Treasury starting in 2013. This replaces the earlier terms of the $188 billion bailout, which required Fannie and Freddie to pay a 10 percent annual dividend.

Fannie and Freddie will also have to shrink their investment portfolios by 15 percent a year, up from 10 percent, until they drop to $250 billion each by 2018, four years earlier than previously required.

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