How Giants received a Single-Mortgage Lease of Life

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For years after the 2008 mortgage market collapse, Republicans and Democrats did not agree much about what they should do

Fannie Mae

and

Freddie Mac

only one thing: Get rid of them.

A trend of an administrative housing-financial trump roadmap would be released last week, allowing the companies under government control to remain at the heart of America's home ownership system for years. Washington reluctantly recognized the difficulty of institutions that entered the market to replace house purchase.

The report of the administration sets out a pathway which the companies would own privately owned but could be stopped by the government. A predicted multi-stage transition on housing markets will not have any immediate impact, but its future impact will have an impact on many data which is yet to be determined.

How policymakers and companies will balance the competing demands of taxpayers, return to company shareholders and ensure access to home loans, who will receive mortgages and terms.

Treasury Secretary Steven Mnuchin is taking questions after hearing from the Senate committee on housing finance September 10.

Photo:

Andrew Harnik / Press Associated

Fannie and Freddie do not borrow but buy them from lenders. They are packaged in securities sold to investors, and provide guarantees to all investors if the loans fail.

This enables lenders to recover their money so that they can lend again, by matching them to investors such as pension funds and hedges that would not otherwise be invested in home loans. This role has helped to preserve a common 30-year American fixed-rate mortgage – another thing that other countries have – including during savings and loan crises in the 1980s.

It also requires an extraordinary amount of government support. The setup felt an implicit understanding in bond markets that the US government would bail out Fannie and Freddie if they ever got into trouble, given the importance of their central role to the national economy.

As a result of the arrangement, the government took over Fannie and Freddie at the start of the 2008 financial crisis when publicly traded companies faced major losses.

They were in trouble by taking on increased risks, primarily to compete with Wall Street firms and subsequently because they wanted legal aid to be maintained by a weakening housing market.

They also made great speculation in a very mortgage market they served, and benefited from the low cost of capital arising from their understandable federal guarantee.
As companies paid their executives too rich, and used their lobbying efforts to make efforts to make them more capital, Fannie and Freddie were welcomed, at the time of crisis. finance, in Washington.

Obama

administrative officials who took part in 2009 were not in line with those of the enterprises sponsored by the government, or GSEs, but agreed that they should not be recapitalized and sent on their way.

At one meeting in 2010, a senior administration officer sought a paper on disagreement by mocking that they had agreed to a public message that could be summed up on a bumper sticker, according to two attendees. The motto: “F — the ESAs.” T

At a later meeting, the White House economist

Austan Goolsbee

compare them to comic book villains who were arrested and imprisoned in a cell on the ocean floor. He would folly, he said, the companies just turn because they promised to behave.

The administration began asking the Conference to promote legislation to replace the mortgage buyers and guarantors. All of the ideas that were possible had their own disadvantages. Many steps would be needed to raise the cost of credit for homeowners.

Meanwhile, when housing markets came back, Fannie and Freddie had bigger roles than before before the crisis. They went from passing large losses to making profits of multi-billion dollar profits, which were collected by the Treasury Department through a fat dividend fixed at the time of their bailout.

The companies still held public shares, which many investors found to be unhelpful, but were disturbed by some asset specialists. In 2012, the Obama administration replaced the fixed dividend from Fannie and Freddie where almost all of the companies were in profit for the Treasury, damaging investors' promises.

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With this transfer, and the housing market return, some of them started in Washington defending the ESAs, particularly when their payments to the government exceeded the cost of bailout 2008. Taking a page from Fannie and Freddie's lobbying muscle, some investors started paying non-profit groups and industry experts who were well connected to argue that the companies should not be dismantled.

They also challenged challenging as an unconstitutional claim on almost all profits of Fannie and Freddie. For years, the courts ruled against these faults.

Some old industrial soldiers maintained the goal of not replacing mortgage companies. “Plumbing in the US mortgage market runs through these companies,” he said

Daniel Mudd,

Fannie Chief Executive from 2005 to 2008.

By the end of the Obama administration, the companies made operational changes limiting the risks of US taxpayers. They were forced by their regulator to adopt stricter underwriting standards, reduced their investment portfolios and reduced sales of new instruments whereby private investors took some loan losses into. Curbs were also in front of an executive wage.

While Republicans were in charge of the campaign for a long time to eliminate these companies, when financial director Trump-campaign was

Steven Mnuchin

he was interviewed for a Treasury secretary post, and included a reform of Fannie and Freddie in this priority list.

Mr Mnuchin, as secretary to the Treasury, addressed the issue, not as a Washington insider, which was a major player in the 1990s and the 2000s over the ESAs but as an old capital in the capital markets. He was running the mortgage trading desk

Goldman Sachs Group
Inc.

and subsequently oversaw the turnaround of a failed thrift, IndyMac Bank, which was renamed OneWest Bank.

Mr Mnuchin invested in OneWest alongside him

John Paulson,

a hedge fund investor known to make a profit by shortening the subprime mortgage market before going into danger, which later contributed to the revival of Fannie and Freddie. Mr Paulson was also the lead donor for the Trump campaign and agreed in Mr 2016, Mr Trump and Mr Mnuchin as investors in Mr Paulson's hedge funds, in accordance with financial disclosures.

“It is clear that an Exchequer secretary has a deeper personal understanding of the housing financial market than anyone else who may have previously sat in his seat,” he said.

Timothy Mayopoulos,

Fannie Mae's chief was for six years until last year.

“The whole housing-financial system has changed dramatically and is starting from scratch to focusing on what should be preserved because it works, and what is not,” said Mr Mayopoulos.

Then candidate Donald Trump with the investor John Paulson in September 2016. Mr Trump invested in Mr Paulson's hedging funds, according to financial disclosure.

Photo:

Seth Wenig / Press Associated

No policy maker comprises more than a change

Mark Calabria,

liberal economist asked the financial giants to abolish a mortgage for a long time and rejected the idea of ​​gradual changes.

Now, as head of his regulator, the Federal Housing Finance Agency, Mr Calabria will have the lead role in implementing the Treasury's blueprint.

The debate about what Fannie and Freddie is about arose as “What is the problem of public policy that we are trying to fix?” Mr Calabria said. “It's good to see that.”

The boom of another mortgage company boomed last week when a federal appeal court overturned control which supported brushing their profits into the Exchequer. The court did not validate the sweeping, but the ruling suggested that the judges were critical. The administration is deciding whether to appeal.

Messrs Calabria and Mnuchin asked law makers to act on a broad reform of housing finance. This is a high order as the presidential election cycle takes effect, particularly after ten years of inaction by Congress. The Treasury and the FHFA are therefore preparing to privatize the companies administratively.

“This problem is that the legislation in this area is difficult, and without it, there are no great tools to resolve the current status of the companies rather than recapitalization and release them from government control,

Jacob Lew,

Treasury Secretary from 2013 to 2017 in the Obama administration.

The first step is the amount of capital that mortgage companies must hold to absorb future losses, through a combination of retained earnings and new stock offers over a number of years.

Subsequently, the government could exercise warrants allowing them to get nearly 80% of the firms' joint stock before they sell the shares in a public tender.

Director of Federal Housing Finance Agency left Mark Calabria, right, with the Secretary of Housing and Urban Development Ben Carson

Photo:

Andrew Harnik / Press Associated

The activities of future companies could be limited as a condition to continually rely on federal backup. Under Trump's administrative plan, they would pay a fee for this support.

Fannie and Freddie would be helped to privatize because of their perceived government guarantee. Critics are concerned that privatization could give one day to the circumstances of the original crisis, and that the companies from shareholders or government would be under pressure to take too many risks.

Policy makers could move to recapitalize companies quickly by making stock offers and attracting dividends to investors. But ultimately these dividends would be against the target of having enough capital to protect taxpayers. Meanwhile, the pressure to keep the government's housing costs low could cut too little for a federal guarantee.

“Republicans are standing up for shareholders. The Democrats are standing up for customers, and no one stands up for taxpayers' liability, ”said

Lawrence Summers,

President Clinton was an Exchequer secretary and an adviser to President Obama from 2009 to 2011.

“It is a politically strong formula. You rank very effectively the most common constituency in America – homeowners – with the shareholders. ”

“I like, for example, 'Back to the Future,'” said Mr Summers, who began to worry in 1999 about the risks the companies may have.

Customers organized in July 2008 before a Santa Monica branch, Calif., Of failed failed IndyMac Bank. Steven Mnuchin, now secretary of the Treasury, helped him get around under the new name OneWest Bank.

Photo:

BOUYS GABRIEL / AFP / Getty Images

Mr Mudd, former Chief Executive of Fannie, said he remains skeptical about how well a company can serve two different masters: fulfilling a public mission to ensure access to mortgages in all markets and at all times, and private investors. always satisfy.

“There is one foot on the rolling log of public policy, and the other foot on the rolling log of running a commercial business that can raise its own capital,” he said. “There are times when these logs don't stay close together.”

Write Andrew Ackerman at andrew.ackerman@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

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