A top U.S. Department of Treasury official effectively ended any speculation that the government’s 7-year-old conservatorship of Fannie Mae and Freddie Mac would end before the 2016 presidential election in an editorial on Bloomberg View on Monday.
In an editorial titled “How Not to Fix Fannie and Freddie,” Antonio Weiss, Counselor to the Treasury Secretary, called the push to recapitalize the GSEs and release them from the FHFA’s conservatorship “misguided.” Weiss claims that such a “recap and release” proposal, if executed, could raise the cost of mortgages and potentially expose American taxpayers to another bailout.
Fannie Mae and Freddie Mac operated for decades as GSEs but began to chase market share with riskier mortgage products in the years immediately prior to the financial crisis, Weiss said. When the housing bubble burst, Fannie Mae and Freddie Mac were left holding trillions of dollars of mortgage risk, and their failure would have had “devastating consequences for homeowners and for the broader economy,” according to Weiss. With Fannie Mae and Freddie Mac on the brink of insolvency, the government bailed out the GSEs for a combined $187.5 billion in 2008, at which time they were placed in conservatorship of FHFA.
With the conservatorship passing its 7-year anniversary in September, much talk among lawmakers has centered on GSE reform and on privatizing Fannie Mae and Freddie Mac. But Weiss contends that the recap and release proposal that is being bantered around is not an effective way to do it.
“We learned the hard way that the old business model of privatizing gains while socializing losses doesn't work,” Weiss said in the editorial. “The Obama administration wants to transition to a better system, one that provides broad access to housing supported by a sound and robust mortgage market, without exposing taxpayers to another rescue.”
“We learned the hard way that the old business model of privatizing gains while socializing losses doesn't work." — Antonio Weiss
Weiss contends that recap and release would not work for three reasons:
- Access to the housing market would not increase for creditworthy borrowers who are shut out of the housing market or for renters who cannot afford a home
- Taxpayers have not been fully “repaid” for the 2008 bailout, contrary to the claims of some private investors; while the GSEs have received more in total dividends than the $187.5 billion they injected into the GSEs back in 2008, Weiss contends that dividends alone “aren’t adequate compensation for the extraordinary risk taxpayers took on and continue to bear.”
- Some have suggested that allowing Fannie Mae and Freddie Mac to retain their earnings would allow the government to stop supporting the GSEs in the near term, which overlooks the high level of capital that is required to cover the $5 trillion worth of assets currently held by the GSEs. Weiss cites analysis from Moody’s and the Urban Institute which found that recap and release would drive up the cost of mortgages, since it would take decades for Fannie Mae and Freddie Mac to build safe and sound levels of capital to operate.
Weiss said the one point everyone can agree on is that seven years after the crisis, “the housing finance system remains the great unfinished business of financial reform,” and that the country needs "a housing finance system that ensures sustainable, fair, and affordable access to housing and limits the risk of taxpayer-funded bailout.” The only way to achieve such a system, Weiss, contends, would be for private capital to take on most of the risk. He contends that only comprehensive legislation can achieve the goals of ending the conservatorship and creating and affordable, sustainable housing finance system.
“The default must not be a return to a model that failed,” Weiss concluded. “We owe it to the American people to create the housing finance system they deserve.”