THE EFFECTS of financial crises have a habit of lingering. In 2008, having suffered heavy losses amid the wreckage of America’s housing market, Fannie Mae and Freddie Mac, the two “government-sponsored enterprises” (GSEs) that support much of the country’s mortgage finance, were bailed out by the federal government to the tune of $188bn. They were placed in “conservatorship”, a form of government control. That was supposed to be temporary. It has lasted for more than a decade. On September 5th the treasury secretary, Steven Mnuchin, published a long-awaited plan to privatise Fannie and Freddie. He calls their status “the last unfinished business of the financial crisis”.
Fannie and Freddie are at the core of America’s system of housing finance. They buy mortgages, mainly from banks, then bundle them into securities which they guarantee. They then either retain those securities on their own balance-sheets or, far more often, sell them to investors. (European banks, by contrast, tend to retain the mortgages they originate as loans on their balance-sheets.) Between them the two GSEs provided $460bn of mortgage finance in the first half of this year; more than $5trn of housing-related securities or guarantees sits on their balance-sheets, nearly half the total outstanding in America.
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Under public control the GSEs have been forced to hand over the bulk of their profits to the Treasury—and since 2012, the lot—in an effort to claw back the cost of the bail-out. In all, since 2008 Fannie has coughed up $181.4bn and Freddie $119.7bn. Hedge funds have invested heavily in the companies’ stock, hoping that Mr Mnuchin’s plans would clear the way for Fannie and Freddie’s shareholders to be paid more cash. The share prices of both have more than doubled this year. However, Mr Mnuchin seems to have disappointed them: on September 6th Fannie’s share price fell by 8.8% and Freddie’s by 8.2%.
Investors hoped for a concrete plan. But the treasury secretary’s report is long on aspirations and short on specific policies. As part of his privatisation agenda, Mr Mnuchin wants government support for the housing market to be made more explicit. Rather than simply being bailed out if they run into trouble again, the GSEs should pay a fee for the government guarantees they already implicitly get. He also wants them to face competition; their putative rivals would be chartered and overseen by the Federal Housing and Finance Agency (FHFA), the same regulator that watches over Fannie and Freddie, and would have access to the same guarantees.
However, both these reforms will require Congress to pass legislation. That looks unlikely in the near future, while the House of Representatives and the Senate are controlled by different parties and when America is 14 months away from presidential and congressional elections. Sherrod Brown, the leading Democrat on the Senate Banking Committee, was quick to dismiss Mr Mnuchin’s plan, saying it would “make mortgages more expensive and harder to get”.
With Mark Calabria, head of the FHFA, Mr Mnuchin is due to appear before that committee on September 10th. The administration says it will do what it can without congressional co-operation. Mr Calabria already has the authority to end conservatorship and to reduce the dividend demanded from the GSEs. But in order for Fannie and Freddie to be privatised—at any rate, in a way that makes them safe—they will have to be recapitalised. Under the terms imposed by the government in 2012, Fannie and Freddie have also reduced their capital by $600m a year, remitting those funds to the taxpayer in addition to any profits. Their capital levels fell so low that both required a cash infusion from the government last year.
Privatisation is within the administration’s powers. But what it might mean depends partly on Congress. Without extra competition, Fannie and Freddie will continue to dominate the mortgage market. It is also unclear what it will mean for taxpayers and shareholders: the government will have to strike a balance between charging a fee high enough to reflect the risk of default while allowing the GSEs to build up capital. They may even need another infusion from the public sector. Unfinished business, indeed.