From a small northwestern observatory…

Dear Readers — I’m in the process of moving my blog (such that it is) over to Substack (johnakilpatrickphd.substack.com). For the time being, I’ll double-post both here and there, but eventually all of my economic (and hence, ‘political’) content will be over there. In the meantime, enjoy!

I’ve given two talks in the past two months in which I’ve mentioned the potential ‘privatization’ of Fannie Mae and Freddie Mac. In this mornings WSJ, there are reports that newly minted HUD Secretary Scott Turner plans to move that idea into high gear. Like many of the ‘slash and burn’ policies coming out of the executive branch in the past couple of weeks, this one also may not be well thought thru (to say the least).

First, the briefest of history lessons for the newbies out there. Fannie Mae (the Federal National Mortgage Association) was created in the 1930’s to buy (and eventually privatize) mortgages. In 1968, in an effort to down-size government, LBJ sold off Fannie and made it a private corporation, albeit with the full-faith-and-credit backing of the U.S. Treasury. Freddie (the Federal Home Loan Mortgage Corporation) was founded in 1970, also with Treasury backing, essentially to provide competition to Fannie, although in practice the two work hand-in-hand. Both of these are considered to be Government Sponsored Enterprises, or GSEs for short. In 2008, in the depths of the housing finance crisis, that ‘full faith and credit’ thing kicked in. and in trade for Federal bail-outs, the two enterprises issued what were essentially preferred shares, owned by the U.S. Treasury. Today, the taxpayers of the United States make a BUNDLE of money off of Fannie/Freddie profits — $66.3 Billion at last count.

Every administration since 2008 has wanted to figure out a way to re-privatize the GSEs, with scant results. Part of the problem are the balance sheets. Fannie alone is sitting on $ 4 TRILLION in assets. How exactly do you reprivatize a $4 Trillion portfolio. (And yes, nothing even remotely like that has ever been done.)

Add to that the problem of the implicit guarantee on mortgages. Many reprivatization schemes include the explicit removal of that guarantee. Some reports suggested a ten-percentage point increase in monthly payments on mortgages if this were to disappear, which would be nearly impossible to swallow at a time when mortgage rates are already too high.

There are a LOT of things Scott Turner could do as HUD Secretary to help alleviate the housing crisis in America. He could expand the Section 8 program. He could work for passage of the Affordable Housing Credit Improvement Act, which is currently languishing in committee in Congress, and would clean up and expand the Low Income Housing Tax Credit program. He could expand low-down-payment mortgages though the existing HUD loan program. However, none of these actual solutions are on his radar screen. Instead, we’re talking about Fannie and Freddie.

Few pundits disagree that a well-thought-out reprivatization is a good idea. However, little that’s being done right now inside the beltway seems to be ‘well thought out’. Watch this space for more on the subject.

John A. Kilpatrick, Ph.D., MAI

john@greenfieldadvisors.com