Senate Forgoes Action on Fannie and Freddie For Now

Sam Chandan PhD FRICS Real CapitalAnalytics and the Wharton School Thegovernment-sponsored enterprises, Fannie Mae and Freddie Mac,reported their first quarter 2010 financials earlier this month.Fannie Mae reported a net loss of $11.5 billion in the firstquarter; Freddie Mac, a loss of $6.7 billion. The bulk of theselosses is associated with activities related to the GSEs'single-family housing mission and not their support for themultifamily sector. In fact, Fannie Mae reported a that its Housingand Community Development business segment, which encompasses itsmultifamily guaranty book of business, earned $99 million in thefirst quarter. At Freddie Mac, the 60 day delinquency rate on itsmultifamily mortgage portfolio remains just 0.24 percent. While theGSEs' multifamily portfolios have performed significantly betterthan the broader market, losses in their single-family lines ofbusiness dominate. To offset the resulting net worth deficits atFannie and Freddie, the Federal Housing Finance Administration hasnow requested an additional $19.0 billion in Treasury financing forthe GSEs. This investment, made under the terms of the seniorpreferred share agreement that came into effect with the September2008 conservatorship, brings the total public investment in theGSEs to $145 billion. The 10 percent coupon on this investmentrequires that the GSEs now make annualized payments of $14.5billion to the public purse. The sheer size of this obligation nowprecludes the GSEs' returning to profitability under their currentstructures. The announcement of the GSEs' first quarter losses andthe new round of Treasury investment coincides with the broaderfinancial reform debate in the Senate. And while the legislationintroduced to the Senate floor by Chris Dodd does not directlyaddress the long-term restructuring of the GSEs, members of theSenate have seized on the latest results in introducing relatedamendments. An amendment introduced by Republican Senators McCain,Shelby, and Greg would have mandated an end to conservatorship intwo-years' time. This amendment was ultimately defeated, 43-56, ina May 11 vote. Coinciding with the defeat of the McCain bill,another, significantly weaker amendment was passed, 63-36,calling for further study rather than a specific course of action.Amendment 3739, introduced by Chris Dodd, requires only thatrecommendations be offered by the end of January 2011. Theamendment requires that the "Secretary of the Treasury shallconduct a study of and develop recommendations regarding theoptions for ending the conservatorship ..." While the amendmentcalling for study falls short of real action, the Senate was rightto defeat the McCain amendment. No doubt, delays in addressing thelong-term structure of the GSEs and their mandates in thesingle-family and multifamily markets are problematic. Nonetheless,the magnitude and significance of these institutions preclude theirbeing fully- and properly-addressed as a subset of the financialreform legislation. I had the opportunity to speak with GlobeSt'sErika Morphy about this very issue, and commented as follows: ...The Administration's proposal for restructuring of Fannie Mae andFreddie Mac was originally planned for February. The postponementof a formal plan has prolonged the uncertainty about the long-termstructure of the residential finance system in the United States.It also extends uncertainties about the ultimate fate of the GSEs'multifamily finance roles.

The costs to the public purse that have followed conservatorship- in the form of senior preferred share investments in the GSEs -have kept the issue of GSE reform on the political and policyagendas. With the Treasury Department investing billions of publicdollars each quarter to ensure the net asset value positions ofFannie and Freddie, it is understandable that many constituencieshave grown frustrated and want to see the issue addressed now -conclusively - as part of the financial reform bill. But therestructuring of the American residential finance system is anenormous undertaking with global implications and must be addressedas a discreet issue. Fundamental questions regarding housing policyand market structure cannot and will not be addressed in anintelligent way as part of a two-week financial reform debate.