NOV 30, 2012 11:23am ET

New Treasury Blueprint for Fannie and Freddie Is on Hold

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A new Treasury blueprint on what to do with Fannie Mae and Freddie Mac appears to be on hold and may not see the light of day until secretary Tim Geithner leaves the agency sometime early next year, according to Washington officials.

Moreover, the idea is to have the new Treasury secretary—whoever that may be—put his imprint on the product.

Advisors and officials familiar with the issue noted that Michael Stegman, special counsel for housing finance policy at Treasury, has been working on a new GSE white paper for several months, a product that was almost released during the presidential debates but was then pulled back by the White House.

Stegman heads Treasury’s “housing reform working group.”

The agency declined to comment on the matter for this article.

Meanwhile there is a growing belief that the next Congress—which is toiling with the fiscal cliff issue—is in no mood to tackle GSE reform anytime soon.

But one former Treasury official has come up with a plan to privatize Fannie Mae and Freddie Mac, an option that he believes could generate $100 billion—money that Congress could use for deficit reduction.

Jim Millstein, while at Treasury, engineered the rescue and revival—and stock sale—of insurance conglomerate American International Group.

He hopes the $100 billion figure might lure Congress to consider his plan to “radically restructure” the GSEs, turning them into privately capitalized mortgage insurers with no special charters or government privileges.

Back on Wall Street and heading his own investment boutique, Millstein believes “it’s crazy” to keep Fannie and Freddie in conservatorships where they are guaranteeing new mortgages (with Treasury backing) but with only $1 of real net worth. (The two GSEs owe the government about $140 billion.)

His plan calls for winding down their huge mortgage portfolios over a three- to four-year period and allowing the GSEs to retain their earnings and profits to rebuild capital.

Right now those dollars are going to Treasury. Under Congress’ arcane budget rules, those funds don’t count toward deficit reduction.

“In our estimation, the common stock could be sold for an amount that would be more than sufficient to pay back the federal government more than $140 billon,” Millstein told NMN.

Millstein’s idea is to build on a GSE reform option that Geithner is believed to favor.

That option calls for creating a new government agency that provides re-insurance for qualified mortgage-backed securities.

Once the GSEs are sold to the public, Millstein explained, they would become private mortgage insurers that could purchase re-insurance from this new agency. (So could other private insurers.)

But to make that happen, Congress must pass legislation to create this new agency. Many lawmakers, particularly Republicans, do not want to create another government mortgage agency or consider new loan guarantees.

FBR Capital Markets’ analyst Edward Mills noted the mortgage market is currently dependent on government guarantees.

“The private-label market is broken,” he said.  MBS investors “need a government guarantee to ensure they will get principal and interest back.”

Millstein noted, “Once the lawmakers begin focusing on the fact that a privatization transaction would count as deficit reduction, our guess is that interest in a privatization transaction will increase on the Hill.”

If his plan is adopted, the private insurers would take the first loss before the new government re-insurance agency takes a hit.

Fannie and Freddie would no longer be government-sponsored enterprises, he said.

They would be “truly private companies who are buying government re-insurance for a price,” Millstein said.

 

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