Many members of Congress—especially the hardcore conservative wing of the GOP—would love to see Fannie Mae and Freddie Mac disappear from the face of the earth. After seeing the GSEs tap Uncle Sam for $150 billion in cash (and counting) to keep their net worth position in the black, elected officials have said enough's enough.
But the problem with pulling the plug on Fannie and Freddie is much more complicated than might imagined for two simple reasons: 30 months after being placed into conservatorships both are still overwhelmingly gigantic in size with $4.85 trillion of guarantees/holdings and their purchase market share—according to figures compiled by this newspaper—is now larger than it's ever been.
Fannie Mae, for instance, bought $856 billion of home mortgages last year, which means 51% of every loan funded in the U.S. was acquired or guaranteed by the GSE. Freddie's purchases were half the size of Fannie's at $412 billion.
"When I saw their market share numbers I was astounded," said Glen Corso, managing director of The Community Mortgage Banking Project, a trade group whose members have a vested interest in the GSEs' future.
In 2009, Fannie and Freddie had a combined purchase market share of 72%. In 2005—just as the subprime origination market was nearing a peak—their combined purchase market share was a mere 37%, NMN found. (Market share is determined by dividing their loan acquisitions by all residential mortgages originated by the industry in a given year.)
Back then both firms were publicly traded "private" companies with highly paid executives picked by a board of directors who were both politically well connected and who managed successful companies of their own. (Some were academics or former regulators.)
Mid-decade, when their respective boards and executive committees saw that they were losing market share to Wall Street via subprime and alt-A, both jumped into the nonconforming market, a move that would eventually be their undoing. Today, Fannie and Freddie are led by government-approved CEOs—Michael J. Williams at Fannie and Charles E. Haldeman at Freddie, neither of whom will have much of a say regarding their fate via Congress and the White House.
In a week or so the Treasury Department will release its blueprint on the future of the GSEs with the expectation that there will be no government mandate from the agency, but rather a list of options on how to transform the secondary market.
This week, a House Financial Services subcommittee, chaired by Rep. Scott Garrett, R-N.J., commences a series of hearings on their future with a focus on what immediate steps can be taken to stem their losses. The two are scheduled to report their fourth-quarter results by month's end.
Meanwhile, as any mortgage banker can attest, without Fannie and Freddie, there would be no mortgage market.
The Government National Mortgage Association has a 24% market share through its guarantees of FHA and VA loans and there is growing evidence that the nation's megabanks (and even smaller players) are beginning to hold more residential loans on their balance sheets.
Still, the numbers are staggering: almost $5 trillion in mortgage assets for the GSEs, $1 trillion in GNMA guarantees and $1 trillion in bank-held whole loans.
Regarding the future, the talk about replacing Fannie and Freddie has ranged from establishing a covered bond market for residential loans to charging FDIC-like premiums for catastrophic losses on new MBS. Getting there will not be easy.
