Freddie Mac takes the first step in transferring mortgage default risk to the private sector

NY Times: - In an appearance in Phoenix, Mr. Obama will endorse bipartisan efforts in the Senate to wind down the two companies and end their longtime implicit guarantee of a federal government bailout. That dread prospect, once thought improbable, was realized in the fall 2008 financial crisis; Fannie Mae and Freddie Mac, then bankrupt, were made conservators of the government at great cost to taxpayers, who only now are being repaid.

The president, according to administration officials, will make clear that he will only sign into law a measure that puts private investors primarily at risk for the two companies, which buy and guarantee many mortgages from banks to provide a continuing stream of money for lenders to provide to additional home buyers.

"Wind down the two companies and end their longtime implicit guarantee" is a hell of an undertaking, considering that transferring these agencies into private hands did not work so well the last time. What about simply getting rid of them?  The problem is that the US banking system simply can not absorb the mortgage loan volumes currently generated in the US. And with the new Dodd Frank-based capital constraints on banks, adding massive mortgage portfolios to their balance sheets will be even more difficult. The only way to reduce this reliance on the federal government is to involve private investors in underwriting mortgage credit risk.

 

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