How Fannie and Freddie Will Become Instruments for the Upward Transfer of Wealth

“We have been unable to find any purpose for the huge balance sheets of the GSEs other than profit creation through the exploitation of the market-granted subsidy.”

-Federal Reserve Chair Alan Greenspan (2005)

Prior to 2008, Fannie and Freddie had been run like a Wall Street bank. The government had recruited Wall Street wizards as executives. These wizards did exactly what they had been doing on Wall Street: ran Fannie and Freddie to maximize their own paychecks. As Steve Denning wrote in Forbes:

“ Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.”

In 2009, the siblings were put into conservatorship and run as a government service like the post office.

After F&F were run as a government service, they became highly profitable. Dianna Olick, and others, captured the situation perfectly in the heading of their article for CNBC: Decade after housing crash, Fannie Mae and Freddie Mac are Uncle Sam’s cash cows.

* By the end of 2019, the cash cows had repaid a whopping total of $301.3 billion in dividends to the U.S. Treasury

* That is approximately $113.8 billion more than they received in bailout funds.

“ As a practical matter, it’s what has helped us to reduce our overall deficit”.

As of the date of writing, they remain in conservatorship.

The Vultures Are Circling

* Ackman made the case that the stocks would be worth between $23 and $47 per share if they were allowed to return to shareholder control.

* Currently, Fannie’s and Freddie’s shares are worth $2.38 and $2.29 respectively. So, even on the low end of Ackman’s estimates, this would be a tenfold increase in value.

That would only be the immediate capital gain. These hedge funds are mega donors to politicians. Once F&F are taken out of conservatorship, the hedge funds would pressure for a complete distribution of the new/yearly- huge profits by dividends as they successfully have done in stripping so many corporations.

In that article, McLennan defends these new shareholders’ right to do so:

“After all, a lot of these people bought or held onto their shares when they were trading for as little as $0.10 and the agencies were left for dead by many market experts. They took the risk, now they want some of the reward. Sounds reasonable, right?”

No! It is not the least bit reasonable. The hedge fund shareholders bought at rock bottom prices from other shareholders. They did not contribute one penny to helping keep Fannie and Freddie alive. It was the home mortgage borrowers who paid higher fees so Fannie and Freddie could repay the bailouts.

The mortgage borrowers should be given a share of the profit by way of a refund of the excessive charges.

Once dedicated to helping homeowners acquire affordable housing, F&F will soon gain be run for greater profit under the control of hedge funds. We will see another venue for the upper transfer of wealth from struggling homeowners- in the context of high unaffordable mortgage rates- to the hedge fund multimillionaire members through Fannie and Freddie fees.

Return to Capitalist Principles

And- all this is unnecessary to support housing purchases for the average citizen as the Canadian experience proves. As explained in my previous post: both Canada and the US achieved the same percentage of home ownership that peaked at 69% in 2011 .

The Canadian experience shows that the Fannie and Freddie securitization innovation did not improve the percentage of homeownership. Rather the agencies are an example of good intentions — bad outcomes.

* Abolish Fannie and Freddie and the government guarantee to investors.

* Require banks to keep all mortgage loans issued on their own books.

* Have the applicants pay for mortgage default insurance if they have a low downpayment and slightly below threshold credit scores.

* Encourage competition with the FHA insurance program from private insurers as Canada does.

However, the most likely result will be that Fannie and Freddie will be turned over to the hedge fund shareholders. Most of America will not see this return of F&F to a model for the upward transfer of wealth.

Acknowledgement: Image by RDNE on pexels.

Originally published at https://jandweir.substack.com.