6 ms·

How Freddie and Fannie Are Held Captive

18 points by hvo 10y ago

jhulla 10y ago
Freddie and Fannie were the epitome of privatize the profits and socialize the losses. Since inception they've benefitted from lower capital and mortgage insurance costs due to their implicit government backing. In return, they've accepted substantial oversight from the government in regards to their loan acceptance standards. The 2008 rescue and then QE where the Fed bought Agency debt by the billions made the implicit government guarantee very, very real. When Fannie and Feddie went insolvent, Congress and the Obama administration as the rescuers had the opportunity to completely wipe out the public shareholders and take over the companies. This is what should have been done. Instead, we now have zombie public companies whose profits are siphoned off through political agreements instead of explicit contracts open to public scrutiny.
- harryh 10y ago
  In 2007/08 shareholders of Freddie & Fannie lost over 99% of their investment. How is that not a privatized loss?
- pcarolan 10y ago
  The article is making the case that they've become socialize the losses and socialize the profits... and goes on to say that this is somehow bad because shareholders. It seems to me that the status quo is a good compromise if you believe in the original intent of subsidizing American home purchases.
  - jhulla 10y ago
    Public companies socialize their profits through tax, legal, labor and regulatory compliance. According to the article, Fannie and Freddie are being hit above and beyond those. This is quite unfair to the public shareholders. If Congress wants the public benefit, then Congress and the White House should have wiped out the public shareholders in 2008 and taken over the companies.
    - tosseraccount 10y ago
      Share holders essentially were wiped out and the government did take over Fannie and Freddie. The remnant equities have very little value. Only people interested in the last 8 years are lawyers hoping to get paid off. What they should do is auction off the assets, pay off their creditors and let the banks, credit unions and other organizations manage the risk. There's plenty of competition in the lending business.
      - pcarolan 10y ago
        Why? We got into this mess because the banks couldn't manage the risk and we had to bail them out.
        tosseraccount 10y ago
        Banks got into it because the government was guaranteeing it. Make a loan, collect the fee, dump the junk on the tax payer. Government enabled and subsidized this. And still does. Home loan deductions, anybody? We didn't have to "bail them out". We should have let them go chapter 11. Plenty of folks with responsible finances could have bought up the assets.
        collyw 10y ago
        It happened to banks outside the US, where they weren't guaranteed (but did get bailed out).
    - ddeck 10y ago
      >This is quite unfair to the public shareholders. Admittedly they may not be the same shareholders, but let's not forget that Fannie/Freddie shareholders have benefited untold billions pre-crisis by being able to fund for years with an implicit government guarantee that was never paid for. http://www.federalreserve.gov/pubs/feds/2005/200505/200505pap.pdf http://www.federalreserve.gov/pubs/feds/2005/200505/200505pa...
    - pcarolan 10y ago
- rayiner 10y ago
  > Freddie and Fannie were/are the epitome of privatize the profits and socialize the losses. The article says precisely the opposite: > But now, with the unsealing of documents this week that were produced as part of a lawsuit filed against the government, new evidence is coming to light on how intimately the White House was involved in the Treasury’s decision in August 2012 to keep all the companies’ profits for the government. That move effectively maintained Fannie’s and Freddie’s status as wards of the state.
  - jhulla 10y ago
    You are correct. I removed the "are".
wheaties 10y ago
The biggest issue is the structure of the mortgage finance industry. They've grown so dependent upon Fannie and Freddie that there does not exist a good private alternative who can compete on equal terms. And who can blame them? I wouldn't want to buy a 30yr loan paying ~4% interest. They sell those loans as fast as they can and collect their fee. There's also a reluctance of the political parties to scale them back due to the repercussions it would have on home buyers. Who wants to be known as the candidate that stopped X from buying a home?
- pcarolan 10y ago
  Mortgage subsidization is the whole point of the program, not sure I see the issue in your argument. We get lower mortgage interest rates because they exist.
  - wheaties 10y ago
    One of the issues with Freddie and Fannie is that they were privately owned but back stopped by the government (not explicitly.) So when they were taken over by the government, the idea was that something else would take their place. There isn't an alternative currently and structurally within the private sector to do that. Mortgage REITS are also not the answer, they are too dependent on short term funding; funding that can and will dry up at a moments notice.
    - pcarolan 10y ago
      Yep, the government's goal is to promote stable home ownership. Investors should invest in mortgage brokers if they want the socialized benefits of the governments policy, because the loans just end up in fannie/freddie after origination and servicing fees are collected. The government wants control because they hold all the risk.
      - toomuchtodo 10y ago
        > Yep, the government's goal is to promote stable home ownership. Which I don't understand, because mobility is more important in the current economic jobs climate. With cheap mortgage money, you're subsidizing people handicapping their ability to earn an income if their job evaporates. The federal government needs to incentivize remote work through tax policy if it continues encouraging homeownership (which I agree is good from a societal perspective), or remove all support from the residential real estate market and allow the free market to be free (ie remove the subsidized benefits of buying vs renting, let landlords absorb the risk of large capital outlays for housing units).
dikdik 10y ago
It's like Freddie and Fannie took out a student loan! They're finally making good money, but those interest rates man.
devishard 10y ago
I do think that shareholders simply should have lost their shares when the FMs failed--that's what happens to any other business that's fails. Why would they be exempt just because their failure was big enough to be catastrophic? And nothing has changed. Just because the government didn't explicitly take away their shares doesn't mean they are suddenly entitled to the profits that the public investment in their companies has reaped.

18 points by hvo 10y ago

Freddie and Fannie were the epitome of privatize the profits and socialize the losses. Since inception they've benefitted from lower capital and mortgage insurance costs due to their implicit government backing. In return, they've accepted substantial oversight from the government in regards to their loan acceptance standards. The 2008 rescue and then QE where the Fed bought Agency debt by the billions made the implicit government guarantee very, very real. When Fannie and Feddie went insolvent, Congress and the Obama administration as the rescuers had the opportunity to completely wipe out the public shareholders and take over the companies. This is what should have been done. Instead, we now have zombie public companies whose profits are siphoned off through political agreements instead of explicit contracts open to public scrutiny.

harryh 10y ago
In 2007/08 shareholders of Freddie & Fannie lost over 99% of their investment. How is that not a privatized loss?
pcarolan 10y ago
The article is making the case that they've become socialize the losses and socialize the profits... and goes on to say that this is somehow bad because shareholders. It seems to me that the status quo is a good compromise if you believe in the original intent of subsidizing American home purchases.
- jhulla 10y ago
  Public companies socialize their profits through tax, legal, labor and regulatory compliance. According to the article, Fannie and Freddie are being hit above and beyond those. This is quite unfair to the public shareholders. If Congress wants the public benefit, then Congress and the White House should have wiped out the public shareholders in 2008 and taken over the companies.
  - tosseraccount 10y ago
    Share holders essentially were wiped out and the government did take over Fannie and Freddie. The remnant equities have very little value. Only people interested in the last 8 years are lawyers hoping to get paid off. What they should do is auction off the assets, pay off their creditors and let the banks, credit unions and other organizations manage the risk. There's plenty of competition in the lending business.
    - pcarolan 10y ago
      Why? We got into this mess because the banks couldn't manage the risk and we had to bail them out.
      - tosseraccount 10y ago
        Banks got into it because the government was guaranteeing it. Make a loan, collect the fee, dump the junk on the tax payer. Government enabled and subsidized this. And still does. Home loan deductions, anybody? We didn't have to "bail them out". We should have let them go chapter 11. Plenty of folks with responsible finances could have bought up the assets.
        collyw 10y ago
        It happened to banks outside the US, where they weren't guaranteed (but did get bailed out).
  - ddeck 10y ago
    >This is quite unfair to the public shareholders. Admittedly they may not be the same shareholders, but let's not forget that Fannie/Freddie shareholders have benefited untold billions pre-crisis by being able to fund for years with an implicit government guarantee that was never paid for. http://www.federalreserve.gov/pubs/feds/2005/200505/200505pap.pdf http://www.federalreserve.gov/pubs/feds/2005/200505/200505pa...
  - pcarolan 10y ago
rayiner 10y ago
> Freddie and Fannie were/are the epitome of privatize the profits and socialize the losses. The article says precisely the opposite: > But now, with the unsealing of documents this week that were produced as part of a lawsuit filed against the government, new evidence is coming to light on how intimately the White House was involved in the Treasury’s decision in August 2012 to keep all the companies’ profits for the government. That move effectively maintained Fannie’s and Freddie’s status as wards of the state.
- jhulla 10y ago
  You are correct. I removed the "are".

wheaties 10y ago

The biggest issue is the structure of the mortgage finance industry. They've grown so dependent upon Fannie and Freddie that there does not exist a good private alternative who can compete on equal terms. And who can blame them? I wouldn't want to buy a 30yr loan paying ~4% interest. They sell those loans as fast as they can and collect their fee. There's also a reluctance of the political parties to scale them back due to the repercussions it would have on home buyers. Who wants to be known as the candidate that stopped X from buying a home?

pcarolan 10y ago
Mortgage subsidization is the whole point of the program, not sure I see the issue in your argument. We get lower mortgage interest rates because they exist.
- wheaties 10y ago
  One of the issues with Freddie and Fannie is that they were privately owned but back stopped by the government (not explicitly.) So when they were taken over by the government, the idea was that something else would take their place. There isn't an alternative currently and structurally within the private sector to do that. Mortgage REITS are also not the answer, they are too dependent on short term funding; funding that can and will dry up at a moments notice.
  - pcarolan 10y ago
    Yep, the government's goal is to promote stable home ownership. Investors should invest in mortgage brokers if they want the socialized benefits of the governments policy, because the loans just end up in fannie/freddie after origination and servicing fees are collected. The government wants control because they hold all the risk.
    - toomuchtodo 10y ago
      > Yep, the government's goal is to promote stable home ownership. Which I don't understand, because mobility is more important in the current economic jobs climate. With cheap mortgage money, you're subsidizing people handicapping their ability to earn an income if their job evaporates. The federal government needs to incentivize remote work through tax policy if it continues encouraging homeownership (which I agree is good from a societal perspective), or remove all support from the residential real estate market and allow the free market to be free (ie remove the subsidized benefits of buying vs renting, let landlords absorb the risk of large capital outlays for housing units).

dikdik 10y ago

It's like Freddie and Fannie took out a student loan! They're finally making good money, but those interest rates man.

devishard 10y ago

I do think that shareholders simply should have lost their shares when the FMs failed--that's what happens to any other business that's fails. Why would they be exempt just because their failure was big enough to be catastrophic? And nothing has changed. Just because the government didn't explicitly take away their shares doesn't mean they are suddenly entitled to the profits that the public investment in their companies has reaped.