Risk Management

Don’t Let Fannie and Freddie Go: Treasury Official

While housing finance needs fixing, "simply returning [the GSEs] to the way they were before" is neither practical nor realistic, says a Treasury a...
Katie Kuehner-HebertMarch 6, 2015
Don’t Let Fannie and Freddie Go: Treasury Official

Some Fannie Mae and Freddie Mac shareholders want Congress to free the government-sponsored enterprises from the manacles of U.S. conservatorship.

But a top Treasury Department housing official on Thursday called that idea a mistake, and said Congress must do something different to change the housing finance system in the United States.

The official, Michael Stegman, told attendees of a Goldman Sachs housing-finance conference that “simply returning these entities to the way they were before is not practical nor is it a realistic consideration,” according to a Bloomberg story.

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“Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to government support” exposes taxpayers to risk and “is irresponsible,” Stegman added.

Stegman, a senior adviser to Treasury, also defended the federal government’s practice of sweeping profits from Fannie Mae and Freddie Mac. He was responding to shareholders who have sued to stop the practice, Bloomberg wrote.

The two agencies collectively have sent the Treasury about $40 billion more than the $187.5 billion they got in aid after they were seized by the government in 2008.

The GSEs are required to gradually reduce their financial cushions until 2018, when they won’t be allowed to hold any capital.

While Congress figures out housing finance, Stegman said Fannie and Freddie should mitigate against needing more taxpayer support.

To address the volatility in their respective loan portfolios, the GSEs should conduct more bulk auctions of delinquent loans, Stegman said. So far, Freddie Mac has sold roughly $1 billion in defaulted debt, while Fannie Mae has yet to initiate such sales.

The GSEs should also increase transfers of credit risk on new loans to private investors, and consider such transfers for older loans, Stegman said. Moreover, they should open the new securitization platform they’re building to private-label bond issuers.