New white paper
Forging a Path out of Conservatorship for Fannie Mae and Freddie Mac
by Dr. Clifford V. Rossi, Chesapeake Risk Advisors, LLC
For three quarters of a century, the United States housing market thrived under a unique mortgage financing structure centered on the two government-sponsored enterprises (GSEs) Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). It is ironic that out of the! ashes of the Great Depression Fannie Mae was created and during the financial crisis of 2008-2009, both GSEs were placed into conservatorship ostensibly as an emergency measure to staunch continued losses occurring at these agencies and importantly to stabilize the housing market and general economy that was teetering on the brink of collapse.
Ben Graham Lecture Notes
I recently stumbled across two precious resources about the Godfather of value investing, Ben Graham. The first resource is a collection of notes from Benjamin Graham’s lectures when he was a professor at Columbia University. The notes were taken during lectures given in 1946, six years after the 1940 version of "Security Analysis" was published. Read More
The mechanism that granted extraordinary powers to the US Department of Treasury and to the Federal Housing Finance Agency (FHFA), the regulator of Fannie and Freddie; namely the Housing and Economic Recovery Act of 2008 (HERA) has now 6 years after both GSEs entered conservatorship effectively left market in a form financial limbo. To a large degree, Congressional inaction over this period has effectively forestalled any serious plan for bringing one or both agencies out of conservatorship. The last significant legislative action on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform was the Johnson-Crapo Senate proposal that could not muster sufficient votes to reach the floor of the Senate. The sheer complexity of GSE reform coupled with a nearly unprecedented schism between political parties explains why comprehensive GSE reform is for the time being elusive at best.
Meanwhile, the US housing finance system languishes in a form of suspended animation that poses considerable uncertainty to private investors and potential homebuyers alike. The right outcome for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform as explained above is unlikely to occur, however, a solution that would bring private capital back to housing markets, significantly limit but not eliminate taxpayer contingent liability, and address the issues that precipitated the demise of the GSEs is feasible. This solution is already possible within the HERA legislation by granting the FHFA authority to bring the housing GSEs out of conservatorship. This paper presents a roadmap for this solution to GSE reform by outlining the statutory language affording FHFA the powers to unwind the conservatorships, the rationale for such a move, an examination of the causes for GSE conservatorship that have or can be addressed independent from Congressional action and a review of the steps needed to bring the agencies out of conservatorship. The paper provides support not only for why recapitalizing the GSEs makes sense from a public policy perspective, but how it could be done as well as the prerequisites for such action.
See full Forging a Path out of Conservatorship for Fannie Mae and Freddie Mac in PDF format here.