The big secret in U.S. housing
What is the US Treasury's plan for Fannie Mae and Freddie Mac in case of federal takeover?
Voters aren't likely to hear much before the election about plans to end government support for two giants in home finance, Fannie Mae and Freddie Mac. Yet like house prices, the federally backed entities are on the skids – as is the whole idea of Washington continuing to aid investment in a market often treated like a big bet.
But a political campaign is the perfect time to ask candidates what should become of Fannie and Freddie – and the implied federal credit they enjoy that allows them to borrow at low rates, buying and reselling "bundled" mortgages on global securities markets on behalf of private investors.
Politicians don't want to face such an issue, as it strikes at the heart of federal support for a now-precarious home mortgage scheme that benefits mainly the middle class.
But such a question must be asked as share prices for these "government-sponsored enterprises" have plummeted in recent weeks and the two face difficulty in selling debt. The crisis over their existence may come to a head before November.
The primary cause is uncertainty over the vulnerability of their multi-trillion portfolio to the rising number of home loans that never should have been made to risky buyers. But since July 30, when Congress gave the US Treasury a blank check to buy a controlling share, if need be, in the two if they falter, investors have also become uncertain over how much of a haircut they would take if – or once – Treasury takes over these enterprises.
The authority given for a potential purchase of Fannie and Freddie is turning into a self-fulfilling reality. Famed investor Warren Buffet says, "the game is over." Meanwhile, the big secret is Treasury's post-takeover plan for the two and what Congress also might expect.
Will the two entities be temporarily nationalized, broken up into small companies and sold off – with no implied federal credit? Will a much-smaller version of the two be created to support home-buying for only the poorest Americans?
These are not small questions for the housing and financial markets. Fannie and Freddie own or guarantee about half of the $12 trillion mortgage market, not so much out of public need but because they've learned how to lobby Congress to keep them growing – on behalf of shareholders.
Taxpayers need answers if billions are to be required in a potential crisis or if Congress and Treasury plan to maintain Fannie and Freddie in their present form. Yet debate in the campaign is negligible.
The Depression-era days when a market for reselling mortgages needed federal help are over. And Fannie and Freddie don't lower interest rates enough to justify the risk they pose to financial markets if they were to implode.
Nor should a government-backed entity be allowed to use its profits to lobby lawmakers on behalf of shareholders or be able to pressure the housing industry into lobbing on its behalf.
Americans have been misled by decades of government help for mortgages to count on their homes as a piggy bank rather than simply as a house to live in. Now a historic decline in prices is a wake-up call for a debate on whether home ownership deserves to be a drain on tax dollars. Fannie and Freddie are ripe for such a debate.