February 27, 2008 2:21

Fannie and Freddie conquer a bit more of the real estate world

A mere three years ago, the nation's two great government-created, privately owned, politically well-connected buyers of home mortgages, Fannie Mae and Freddie Mac, were in disrepute. They'd both been buffeted by massive accounting scandals. Their CEOs had resigned in disgrace. Congress was talking about significantly reining in their powers.

So what's happening now? Congress approved a big, if temporary increase in the size of loans Fannie and Freddie can buy as part of its economic stimulus package (and don't be surprised if it eventually becomes permanent). And today the Office of Federal Housing Enterprise Oversight, announced that it was going to remove caps on loan portfolio growth at the two companies that had been imposed in the wake of the accounting mess.

In short, official Washington has decided to give Fannie and Freddie substantially more sway over the nation's mortgage markets than they had before. Why's that? Because Fannie and Freddie are about the only people left who are willing (maybe able is the better word) to finance mortgages at less-than-punitive interest rates. For years many on Wall Street and some in Washington had been arguing that the growth of markets in securitized mortgages made F&F superfluous. They don't look so superfluous now.

Fannie and Freddie are able to remain largely unaffected by the craziness roiling mortgage markets because of the assumption among investors that, if too many of the loans they bought went bad, taxpayers would bail them out. It says explicitly on Fannie's and Freddie's debt securities that they aren't guaranteed by the U.S. government, but belief in what's called the implicit guarantee keeps their financing costs low.

Nothing comes for free, though. In the mid-1990s, the Congressional Budget Office estimated that the implicit guarantee was worth about $6.5 billion a year to Fannie and Freddie. It's probably several times that now. Who pays for it? I guess it's spread among the taxpayers who would bear some of the cost of a hypothetical Fannie/Freddie bailout, and the holders of Treasury bonds and other assets that would lose value if the government just printed lots of money to fix the problem.

Is this a good deal for those of us who don't own Fannie or Freddie shares? I used to think it wasn't. Now I'm not so sure.