One Man’s Opinion: Should The Government Wind Down Freddie Mac And Fannie Mae?

92835431Fannie May and Freddie Mac are still supported by the tax payer, but progress is being made as Congress is debating on how to get the government out of the mortgage business. However, Fannie and Freddie are now making money and putting in billions of dollars in the coffers that the government used to bail them out in the first place.

If Fannie and Freddie hadn’t been there in the last five years or so, the prices of housing stocks would have been much lower today, thinks James Lockhart, vice chairman of WL Ross & Co. At some point in time though the government needs to get out of the housing market, and it’s not going to be easy since both Fannie and Freddie’s share is well over half of the 10-trillion dollar industry, Jim noted.

Asked how long Fannie and Freddie would require government support, Jim said there’s some legislation going on and personally he would like to send a legislation proposing winding down of the institutions in the next five years or so and replacing them with a much smaller and purely government insurance program for some mortgage-backed securities. That government-backed program can actually act as a countercyclical force, he observed.

Asked if anything has changed since his June-comment that there wasn’t much intrinsic value in Fannie and Freddie stocks, Jim said he believes at any point in time any government backed agency could be put in receivership and the only reason Freddie and Fannie stock have value is because the government’s been there. They have put the taxpayer’s money at risk and ideally there shouldn’t be any value, he argued.

The latest report from the Mortgage Backers’ Association says the average floating rate on a jumbo loan was lower than the average rate on a 30-year qualifying loan. Asked to comment on it, Jim said Fannie and Freddie are raising their prices now to bring the private sector in, which is a good sign. One of the companies that he invests in does issue jumbo loans at a lower rate than qualifying loans, Jim said.

Asked to explain the logic behind this since the Jumbo loan market is entirely privately operated and not guaranteed by the government, Jim said the rates are being distorted intentionally to bring the private sector back.

Banks and some companies are keeping adjustable rates on jumbo loans lower on purpose, he added. That could be explained only if the underlying credit quality was lower than the jumbo loans and indeed some of the jumbo loans were of strong credit quality with high FICO scores, he noted.

Asked to explain how WL Ross is investing in the housing market now, Jim said the firm is investing in five community banks that are doing mortgages across the country. The firm is invested in two single-family mortgage originators and one multi-family mortgage originator, he said.

Asked if the returns from the housing sector have been satisfactory, particularly if Fannie and Freddie start to withdraw from the market, Jim said the government needs to do more if Fannie and Freddie were to withdraw from the markets eventually. However, he’s satisfied with his firm’s performance.

Asked to comment on a report that suggests BlackStone – the largest landlord in the country, is in talks with Deutsche Bank for a rental income-backed bond, Jim said the development made sense since there’s an income that is secured by rental agreements of 12 months or more.

It’s a tough deal because there’s a lot of upkeep involved in rental houses though apartments are easy to maintain. However, it’s worth giving a shot and see what the market does with it, he concluded.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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