US seeks to privatise mortgage giants a decade after market meltdown

US Treasury Secretary Steven Mnuchin (left) answers journalists questions outside the White House on September 9, 2019. — AFP pic
US Treasury Secretary Steven Mnuchin (left) answers journalists questions outside the White House on September 9, 2019. — AFP pic

WASHINGTON, Sept 10 — A decade after the mortgage bubble burst sparking the Great Recession, President Donald Trump wants to privatise two financial lynchpins of the multi-trillion-dollar American housing sector.

In Senate testimony today, US Treasury Secretary Steven Mnuchin is due to lay out a plan for the reform of American housing finance, including the government-sponsored enterprises known as Fannie Mae and Freddie Mac.

The two organisations — which together back more than half of all US residential mortgages — were placed under conservatorship, or effectively nationalised, during the mortgage meltdown of 2008.

A US$190 billion (RM790 billion) government bailout that year saved the two entities as defaults by risky so-called sub-prime borrowers soared nationwide. 

Little understood by the general public, the two institutions do not in fact originate mortgages. 

Rather, they pump liquidity into the housing sector by buying mortgages from banks and then packaging them as securities which they can either keep or sell onward to investors with an implicit guarantee.

This system eases the financing of long-term lending such as 30-year mortgages, which are rare outside the United States but have been key to achieving the “American dream” of homeownership.

At the moment of the housing market’s collapse, the home ownership rate had hit 70 per cent before tumbling as foreclosures swept the nation.

In a report last week, the US Treasury laid the groundwork for reforms to the two institutions, long a policy goal of the Trump administration.

Even though Fannie Mae and Freddie Mac are hybrid bodies traded on Wall Street, because of the conservatorship, their dividends are paid into the Treasury — something private investors would love to change.

A capital cushion

As the real estate market has recovered and grown stronger in recent years, Fannie Mae and Freddie Mac — whose familiar names arise out the abbreviations for Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) — have sent their robust profits straight into to government’s coffers.

In all, since the federal takeover, they have sent US$300 billion to taxpayers, more than repaying the cost of their bailout.

The Mnuchin reform plan involves dozens of proposed legislative and regulatory measures and aims first of all to recapitalise both organizations by allowing them to keep some of their profits.

This should create a capital cushion to protect them in event of another mortgage catastrophe.

In effect, the Treasury wants to end the tacit government guarantee — which more or less required the original bailout — and instead plans to create a guarantee that is both explicit and already paid for, which will apply to some mortgage bonds.

Mnuchin said yesterday he hoped to win the support of Congress in the “next three to six months.” Failing this, he may move “on the administrative front,” he said.

According to Mnuchin, a reformed federal housing finance system will also boost economic growth.

Once a Goldman Sachs executive, Mnuchin is also a former mortgage banker, having taken over the California bank IndyWest, renamed OneWest, during the crisis.

The release of the housing finance reform plan comes as shareholders’ begin to make progress a legal battle to stop the governments’ collection of Fannie Mae and Freddie Mac profits.

A federal appeals court last week reversed a lower court finding which had supported the government policy. — AFP                

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