President Obama Signals Change On Fannie And Freddie Reform

Jan. 21, 2015 10:31 AM ET

President Obama has changed his message on GSE Reform.

Fannie and Freddie Have Paid Back Taxpayers.

The Net Benefit of Fannie and Freddie is Positive for Taxpayers.

Last night’s State of the Union address may have signaled the change in messaging that Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) shareholders had been anticipating. In a note several weeks ago, analysts at KBW suggested that the President would abandon efforts to eliminate the GSEs through a legislative approach. Hopes were dashed shortly thereafter when the President called Congress to pass a bill.

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This change in messaging may have actually occurred last night. President Obama failed to mention Fannie, Freddie, or housing reform at all. In fact the closest he came to this topic was discussing lower mortgage premiums and how they help the middle class to remain strong.

“But you know, things like child care and sick leave and equal pay, things like lower mortgage premiums and a higher minimum wage, these ideas will make a meaningful difference in the lives of millions of families. That’s a fact.”

If President Obama wants mortgage payments to remain low, then he should consider keeping some portions of the current system in place. Namely, guaranteed mortgage backed securities through Fannie and Freddie. The 30 year fixed rate conventional mortgage will remain in place as long as strong insurers remains in place to back them.

What is the cost of this system?

Not only have Fannie and Freddie paid back taxpayers on the $187 billion in accounting losses and interest costs from the financial crisis, they have also backstopped the entire mortgage market. Fannie, Freddie, and FHA became the only lenders doing business during a period of record low interest rates, falling home equity, rampant unemployment and foreclosures, and skyrocketing delinquencies. The cost is low by these measures.

Additionally, Bill Gross gave his opinion in 2010 when he stated that Fannie and Freddie save the average borrower about 300 to 400 basis points on their mortgage.

“The cost would be enormous in terms of yields - 300-400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy.”

If you do the math, this saves the average borrower with a $200,000 mortgage about $400 a month. (A 4% mortgage costs about $1,267 per month. A 7% rate costs about $1,643 per month. An 8% mortgage costs about $1,780 per month.)

About two thirds of the country are homeowners and recent census data shows there are 115.6 million households in this country. One more figure, only 29.3% of homeowners own their home mortgage free. If you extrapolate these numbers, taxpayers in this country are getting a great deal. The total of 54 million households owning homes with mortgages save approximately $4800 per year on mortgage interest because of Fannie and Freddie. This is $259 billion per year in total savings, according to Bill Gross’s estimate, much higher than the stated cost of their bailout. Even if Gross’s estimate is four times too high, the total savings for taxpayers is about $65 billion per year.

Secretary Castro To Promote Government Backstop

The day after the State of the Union address. HUD Secretary Castro gave us a fireside chat. The most promising point made by this rising star of the Democratic Party is that he believe the government has a role to play in the housing market. As he was making this remark the HUD twitter account sent out this message.

“@SecretaryCastro: Government has a role in supporting homeownership. It’s what separates us from rest of the world. #HousinginAmerica.”

This seems to indicate that Castro will be jumping into the fray of housing finance reform.

And what about the HARP and HAMP programs?

If Fannie and Freddie didn’t exist, there would be nobody out there to administer programs to support the market. The GSEs refinanced more that 3 million mortgages under HARP. They save countless families from foreclosure.

The sensible approach for the Obama Administration is to take credit for fixing the financial crisis, reforming Fannie and Freddie, and setting up the next 70 years of economic prosperity in the housing market. That will start by ending the Net Worth Sweep and winding down the conservatorship over these companies.

If the Net Worth Sweep of the companies were to end, many of the lawsuits surrounding this policy would go away immediately. According to Dr. Clifford Rossi, the GSEs could recapitalize in as little as 5 years. And according to Bill Ackman, the common stock of these companies could be worth as much as $45 per share.

http://seekingalpha.com/article/2836576-president-obama-signals-change-on-fannie-and-freddie-reform?notified=2068553

• This topic was modified 1 week, 3 days ago by  dpsims.
• This topic was modified 1 week, 3 days ago by  dpsims.