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The U.S. Congress does not get much done these days. But gridlock is working just fine for Fannie Mae and Freddie Mac. They delivered $12.1-billion (U.S.) in profits last quarter. By the terms of Treasury's $190-billion bailout of the mortgage securitisers, that money (and all of the pair's future profits) is owed to Uncle Sam. And there is more to come for taxpayers if the housing revival continues and lawmakers' dysfunction keeps Fannie and Freddie in their current form.
Vulture investors smell an opportunity. They are buying the securities junior to Uncle Sam's stake, hoping that they will appreciate, if Fannie and Freddie were to be privatised. The vultures cite previous successful privatisations, such as AIG's. But AIG clearly belonged in the private sector; Fannie and Freddie are more complex. Some hold that government should eschew any role in mortgage finance, and that tacit Federal guarantees inflated the bubble. But Fannie and Freddie dominate the mortgage market – guaranteeing half of all home mortgages – and that has made homebuying affordable. What would fill the void?
The vultures' proposal is to turn Fannie and Freddie into privately held mortgage insurance businesses, offloading the mortgages they hold. The idea is that to guarantee mortgages is both noble and profitable, and an adequate capital cushion could be formed by means of fees and private investment. Under such a regime, while the government might backstop the mortgages themselves, the debt of Fannie and Freddie would not be protected any longer. Sounds elegant – but the private sector acumen had its own role to play in forming the crisis.
Meanwhile, there is no rush. Fannie and Freddie, as presently constituted, will keep raking in dividends. The status quo might just deliver taxpayers their $190-billion before the next crisis arrives.