Until now, Fannie Mae and Freddie Mac have been able to defeat all kinds of predictions regarding their failure. They have come out of trouble every time, and have succeeded in building their image as an eternal formulation.
But it is about time that their eternity may be coming to a halt. The two mortgage giants, who were once sponsored by the government, which now controls it, could really be facing their ends. The MBA wants to split up Fannie Mae and Freddie Mac, and it is possible if a functioning mortgage market is maintained without them.
Mortgage Credit-Guarantor Entities
The Mortgage Bankers Association has proposed that the two firms should be split into three smaller, private companies, called Mortgage Credit-Guarantor Entities (MCGEs).
Similar to Fannie and Freddie, government backup will be given to these new entities as well, but they would ultimately own the loans underlying the government-guaranteed securities they issue.
Government wants to create a new type of mortgage-backed security
If there is a foreclosure, the MCGEs would own the real estate collateral. The MBA wants to create a new type of mortgage-backed security that works in two parts. In the first part, the MCGEs would provide loan-level guarantees. In the second part the government would issue an explicit guarantee based on the credit risk in these securities.
Therefore, although the government will still be involved in the business of backing loans, but the new MCGEs would privatize some of the risk.
A strong regulator would be placed to rule over these new entities
The MBA wants to appoint a strong regulator to rule over these new entities, one that is funded through the government-guaranteed insurance premiums. MBA is trying to kick-start the secondary mortgage market, since it’s now been more than two years since the secondary mortgage market collapsed.
Michael Berman, MBA’s vice-chairman said in a public statement that rebuilding the secondary market is critical to restoring liquidity and confidence and the government has an important, limited role to play to ensure a stable flow of funds for mortgages.
Firm’s shareholders have profited handsomely
The government’s rescue of Fannie and Freddie ensured a stable flow of funds to the two firm’s shareholders in 2009. although the shares did collapse in late 2008, those who bought at the start of the new year have profited handsomely, as Fannie is up 90.8% and Freddie is up 141.1%.
Even so Fannie Mae was down 7.6% Wednesday, and Freddie Mac is down 10.5%, meaning that the MBA’s proposal is scaring away some thrill seekers.
The firms owe the U.S. government $100 billion
Hilary Kramer, chief investment officer of A&G Capital Research, said that Fannie and Freddie’s value is zero because (they) could never produce enough profit to pay back that $100 billion. As a result the two firms really are functioning as bubbles, with investors in a frenzy to get in. As a result of this frenzy trading volume is skyrocketing, with over 1 billion shares trading hands on August 24.
Who really benefits from this situation?
The banks and brokerages will benefit from the current situation the most. On a single day, they were able to generate over $30 million in trading fees, just for processing the trades related to Fannie and Freddie.
So Goldman Sachs, JPMorgan Chase and Chase continue to succeed in finding new and interesting ways to make money from the bailouts.
Congratulations, America. You’ve blown up a system that got World investors to finance 70% of US home sales at near Treasury rates without direct federal subsidies. Now that Fannie/Freddie are gone the Mortgage Bankers Association is desperate to put taxpayers on the hook for 8 million home sales a year because the World’s investors have wised up. Don’t be fooled by the MBA plan. It’s designed to give the biggest banks the power to slap federal guarantees on nearly any mortgage they want. The banks earns the profits, the taxpayer eats the losses.