The prospect of Fannie Mae and Freddie Mac taking another draw on Treasury has been a much-discussed and written about topic in the last month. Recently, the Collingwood Group Chairman and former Fannie Mae executive Tim Rood weighed in on the subject on Fox Business Network's Cavuto, according to the Collingwood Group's blog, Voice of Housing, on Thursday.
Rood told host Neil Cavuto that there is a legitimate risk that the two GSEs would have to take a draw from the U.S. Department of Treasury, but the difference between now and when Fannie Mae and Freddie Mac needed a $188 billion taxpayer bailout in 2008 is that now the government's intervention is by design.
"It’s part of this do or die gamble by officials to basically make such a scary outcome, engineering a crisis at Fannie Mae or Freddie Mac to compel Congress to act, and it's not working so well," Rood said.
The two GSEs were taken into conservatorship by the Federal Housing Finance Agency (FHFA) in September 2008 and returned to profitability in 2012, four years after the original bailout. In 2013, the profits of Fannie Mae and Freddie Mac combined totaled $135 billion, but they relied mostly on non-recurring items for profits. In 2014, without those non-recurring items, their profits shrunk to about $22 billion. Rood said that the GSEs returning to profitability and in fact being about $40 billion up from the original bailout amount was "a pretty remarkable turnaround, but you can’t have that kind of luck forever."
A white paper released in mid-March by the Office of the Inspector General of the FHFA, the GSEs' conservator, titled "The Continued Profitability of Fannie Mae and Freddie Mac is Not Assured," expressed similar sentiments to those voiced by Rood, whose two decades of mortgage industry experience include serving as of Senior Director and Principal of Fannie Mae’s eBusiness Division. The white paper indicated that if losses related to decreasing home prices, interest rate changes, or provisions of the GSEs' agreement with Treasury that require them to reduce their portfolios resulted in either Fannie Mae or Freddie Mac reporting a negative net worth, then "that Enterprise would be obligated to draw on Treasury’s funding commitment."
"This new chatter about the solvency of Fannie and Freddie is because the way the government has engineered their takeover of Fannie Mae and Freddie Mac essentially guts them—it takes all the profits from the organization and it makes them deplete their capital levels," Rood told Cavuto. "And by deplete I mean handed to the Treasury Department.”
On the Obama Administration's recent policy changes intended to give more prospective homebuyers access to credit, Rood acknowledged that the administration wants to responsibly expand the credit box and make homebuying more affordable by lowering the interest rate – but at the same time, he said lenders are compelled by capitalism rather than patriotism to use government programs.
"There’s so many risks associated with doing these programs that what lenders learned over the last five to six years is that the whole time they thought that they were selling credit risk off to Fannie Mae, Freddie Mac, (and) the FHA, it turns out they were renting it because when these loans went into default the government basically armed up, worked with the Justice Department, and came and collected as much as they could from these organizations for what we used to call jaywalking equals capital murder," Rood said. "They would find one little thing wrong with the file and that would cause you to buy the whole loan back."