Yesterday the US Treasury and Steve Mnuchin, laid out a plan to take Freddie Mac and Fannie Mae private… again. Obama and his administration proposed pretty much the same idea as Secretary Mnuchin and the Trump administration six years ago. The argument goes, the US government should not be in the home lending/guaranteeing business. In fact that the US government shouldn’t be in business of any kind.
The following is a reprint of an article I wrote back in August 2013. (Contact Tim Here) This was at a time when the real market was just coming out of its recession. I’ve made a couple of corrective notes to update facts which I’ve italicized, but my position is essentially the same now as it was then. Take a look:
The President (Obama) came out two days ago in support of the conservative agenda to do away with Fannie Mae and Freddie Mac. But there is something that I just don’t understand about the push by the President and Congressional conservatives, why? I guess the concern is that the tax payer could get stuck with the bill again should there be another down turn. After all, the government had to take over the public/private companies following the financial crisis and the tax payer had to “bail out them out.” The cost to the tax payer of saving Fannie was $117B and $72B to save Freddie. To date Fannie has repaid the taxpayer $105B after posting another quarter of record profits while Freddie $41B. (The profits posted to the US Treasury by Fannie and Freddie to date are now in excess of $300B and counting.) Huh, I think I like the government being in certain businesses. In fact, at this rate by next quarter Fannie will be helping to pay down the Federal deficit or maybe since they’re in the lending business, help cover the skyrocketing costs of student loan debt by offering submarket interest rates to our youth. (Are you listening Secretary DeVos?) Does this make me a socialist? I think not. Rather, I think it just makes me logical.
You may recall that the reason the federal government had to step in and bail out General Motors, AIG and Freddie and Fannie, was that the financial meltdown threatened our economic foundation’s very existence. Too big to fail, they said. As a real estate professional I will never forget when the entire secondary loan market ceased to exist. (Don’t forget, Fannie and Freddie are the guarantors of the loans made. Those loans are sold to Wall Street investors aka the secondary market. As a result private industry does benefit because they are buying mortgages backed by the government.. And doesn’t it only make sense that if the U.S. Government, sans The American Taxpayer, as the guarantors of the loans, should also be the ones who profit? It’s our money at risk in the event of another real estate meltdown. Why should we take the risk without the benefit of the reward?) The secondary loan market is the place where mortgages are sold by banks so that they replenish their capital so that they can turn around and lend again. It is the very foundation of our economic system. The secondary mortgage market used to be insurance companies and hedge funds. This is why AIG got into so much trouble; they bought bad bundles of high risk loans and when those loans were defaulted on, AIG had worthless paper. Since AIG is primarily a life insurance company, it was reasoned that to let them fail would put countless retirees, future retirees and beneficiaries at risk of losing the insurance they’d been paying for and their survivors were depending on. To save AIG, the taxpayer had to buy $182B in AIG stock. Gradually the government sold its stake in AIG and eventually posted a $22B profit for the tax payer. A 12% return on our investment. Not bad if you ask me.
I suppose the argument against the US Government being in business is that they have an unfair advantage over the private sector. To this I say, so? In fact I would go a step further. I would say that the government should be in a business partnership with the American people with regards to many businesses, not just the purchasing of home loans, as Freddie and Fannie do. This idea that the government is not letting market forces free float and that that is somehow dysfunctional, fails to recognize in the case of home loans anyway, there is no secondary marketplace (there is now but why would we want wealthy Wall Street investors and insurance companies making the profits we are making?) The insurance companies and hedge funds don’t want to buy home loans. They could but they want higher rates of return. Higher rates of return mean higher interest rates to the consumer. (This is still true as these entities would screw Americans if it meant they’d make more money. Capitalism unbridled is not in the National best interest. In fact I’d argue the role of government in a capitalistic society is precisely to contain Capitalism which by definition is an economic model that puts profits above all else and at any cost. Consider the most recent statement by the CEO’s just last week that corporations need to consider stake holders – that would be us common folk in the neighborhoods these businesses thrive and profit – not just share holders, as part of their mission statement. *see link) This is not in the best interest of the American public, but is for Wall Street money managers and the wealthy who can afford to invest in these companies. So the argument is that the consumer should pay more so that the free market can be free. Hogwash. I want my government to work for me, (not pay for me, give me free or at the expense of free enterprise – I’m not a Socialist, just a working stiff who paid more in taxes than Amazon…) not the other way around. I want the government to be profitable so I can pay lower taxes. I want the government to make so much money, that my healthcare costs are lowered and our kid’s college education is made at least marginally affordable for the average family. Taking this thought a step further, I advocate that the government should be in the energy business; in partnership with free enterprise. For example, the government regularly grants leases to private companies to drill for gas and oil on public lands. The leases we give pay us a fraction of the money and profit these companies earn. Because public lands are ours – we own them, they’re ours – I believe, we should be entitled to share in the profit. A joint venture as it were.
When I worked for Shapell Industries, a Southern California home builder, they had joint ventures on land in Northridge, Long Beach and Laguna Niguel. (Search for homes here) The JV partner didn’t earn as much as the home builder on every home sold, but they did share in the profits. With a public/private partnership on energy, we might for example, be able to restrict the sale of gas and oil extracted from our public lands to domestic refineries for domestic consumption, thus allowing Americans to buy fuel that is at prices that an owner would expect to pay – below market. Why after all, should oil and gas extracted from public lands be allowed to be sold on the open market to China, forcing American citizens to have to compete and thus pay market prices when it came from our land to begin with? Been to Saudi Arabia or Qatar? Do you have any idea how cheap gas is there? Try $0.48 per gallon. (This was actually incorrect as this is a per liter cost not per gallon.) What do you suppose the impact of that kind of cost for fuel would be on our domestic economy? And I’m only talking about energy. What about commodities like iron ore, copper, zinc etc., that are mined on public lands? I think you see my point.
As it stands right now, Freddie and Fannie are turning a (huge) profit, helping to keep interest rates low for borrowers and there’s no one who wants compete with them anyway. So there you have it, my case for keeping these lending giants firmly under government ownership for our benefit, we the people of the United States of America. My name is Tim Freund and I approved this message.