Steve Muehler's Plan to Privatize Fannie Mae & Freddie Mac
Updated: Apr 23
Debate has resumed over the future of Fannie Mae and Freddie Mac after comments by U.S. Treasury secretary Steve Mnuchin that they should be privatized. The two government-sponsored enterprises buy home mortgages, pool them and sell them as mortgage-backed securities in the secondary market, with a share of more than 45% of that market. Fannie Mae and Freddie Mac have been in government conservatorship since 2008 after a government bailout of $187.5 billion rescued them from the 2007 subprime mortgage finance crisis.
Mnuchin’s plan faces challenges such as providing a safety net for the two entities in the event of a housing market crisis; ensuring adequate underwriting standards, and retaining programs for affordable housing and for the elderly, and to promote home ownership.
Under my Administration, I would Privatize both Fannie Mae & Freddie Mac, But with a Safety Net:
When the housing market is healthy, it can manage well on its own without government support. The challenge is: What do you do when things go wrong? Right now the housing market is looking relatively good, and hence there needs to be a push to privatize them now. But, the real question is whether there will be support for that market when things go bad. Fannie Mae and Freddie Mac issued mortgage-backed securities totaled $974 billion in 2016, up 18% over that in 2015, according to Inside Mortgage Finance.
Under my Administration, we would "Find the Right Model"
If Fannie Mae and Freddie Mac go private, there will be concerns about the risks tax payers are exposed to. The two entities along with the Federal Housing Administration originate about 90% of all housing mortgages. The problem is what happens when you have an implicit or explicit government guarantee and private shareholders? Private shareholders will take lots of risk and say, ‘Heads we win, tails taxpayers lose.’ So we need to find a system that is better than that.
Without sufficient capital requirements and other controls, tax payers eventually will end up on the hook for large bailouts. Private shareholders like hedge funds and mutual funds that own about 10% of the two companies have been lobbying in Congress over the payouts they could get when Fannie and Freddie are taken out of conservatorship and fully privatized.
Phasing in the Private Sector
Under my Administration, we would implement a phased plan for taking the two companies private. Under this plan, the government would reduce its role in the companies by tightening restrictions in underwriting mortgages. At the same time, hopes would be for the private market to begin to fill the spaces that the government vacates. This is the most straightforward proposal to convert Fannie Mae and Freddie Mac into a form of catastrophe insurance with a larger footprint than say, a flood insurance program, but something that would reinsure the securities that are being issued. In that plan, the insurance could be priced “as accurately as possible to reflect the underlying risk.
Protecting Affordable Housing Programs
Many people are relying on low down payment programs, and in many cases are putting down less than 5% of the price of the homes they buy. Any plan to privatize Fannie Mae and Freddie Mac must ensure protection for such affordable programs, and others for multifamily housing and rental properties. The best case scenario is we will be able to ensure that the Market accurately prices the catastrophe insurance and find new and hopefully explicit ways to support low-income and multifamily housing. The government needs to find responsible ways to help people in home ownership, because it’s a predominant way of building wealth and for the elderly to be able to manage their lives towards retirement.
Side Note on this Fact: The average down payment today is not much different from what it has been historically, especially since around 2000. The narrative that the government is pushing low down payment programs and inviting a crisis again is false. What has changed since the subprime crisis is borrowers need to have much higher credit scores than they were required to have in the last two decades.
Moves Afoot for Broader Changes
The debate over the future of Fannie Mae and Freddie Mac is occurring amid calls for fiscal changes, such as on tax reform and revisions to deductibility of interest payments on mortgages. I expected pressure on some of the implicit subsidies that are occurring through the tax code on housing. Much of those subsidies go to those at the top end, to high-income borrowers buying homes with high tax rates. Housing policy goals also need to be revisited, especially as many younger people are putting off home ownership since they are marrying and forming households later.
Adding to those are student debt burdens, the challenges facing middle-income workers and income volatility. Under my Administration, we would have a stable housing finance system that has a path to home ownership where people can save and become responsible home owners, without the need for subsidies.
People aren’t getting a 30-year job at the factory anymore; they are bouncing from job to job, and that makes it challenging to save for a down payment and making mortgage payments regularly.
Steve Muehler is the Founder & Managing Member of the Private Placement Markets:
Private Placement Markets: www.PPMSecurities.com
Private Placement Debt Markets: www.PPMDebt.com
Private Placement Equity Markets: www.PPMEquity.com
Private Placement Markets – Real Estate Loans: www.PPMLoans.com
Equity Lock Residential: www.EquityLockResidential.com
Equity Lock Commercial: www.EquityLockCommercial.com
About Mr. Steve Muehler, Founder & Senior Managing Member:
Personal Site: http://www.SteveMuehler.com
Personal Site: www.StevenMuehler.com