Wall Street warns against privatizing Fannie and Freddie without Congress guarantee

Pre-2008 "implicit guarantee" contributed to housing crisis

Jun.June 14, 2019 02:30 PM
FHFA director Mark Calabria is ready to set Fannie and Freddie free, while Wall Street worries about potential risks.

FHFA director Mark Calabria is ready to set Fannie and Freddie free, while Wall Street worries about potential risks.

As the Trump administration gears up to end the decade-long conservatorship of Fannie Mae and Freddie Mac, some voices on Wall Street are warning against doing so without congressional support.

Only Congress has the ability to provide an explicit government guarantee for the $4.7 trillion in bonds backed by the two mortgage companies, and the lack of such a backstop may dissuade some financial firms from buying those bonds, driving up costs and hurting homebuyers, Bloomberg reported.

“Keeping Fannie and Freddie as they are and privatizing them is a dangerous experiment,” Michael Bright, a former acting president of Ginnie Mae, told Bloomberg.

Federal Housing Finance Agency Director Mark Calabria, who is responsible for regulating the mortgage guarantors, recently suggested that a guarantee would not be necessary as long as Fannie and Freddie built up larger buffers of capital. But Wall Street remains unconvinced.

“There’s a whole host of buyers that currently buy these mortgage-backed securities that may not be able to, or may not want to” without an explicit guarantee, Vanguard Group’s Brian Quigley said.

Larger capital buffers are also likely to push up mortgage costs because companies charge higher fees to meet those requirements. Tampering with the economy in the run-up to 2020’s elections could prove risky for President Trump, who supports privatization.

Prior to the housing crisis in 2008, despite any such law or regulation, investors regarded Fannie Mae and Freddie Mac as having an “implicit guarantee” from the government. Critics say this fed excessive risk-taking that led to the crisis. [Bloomberg] — Kevin Sun

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