Fate of U.S. mortgage giants only half clear

Biden’s focus will likely be on using Fannie and Freddie to boost home ownership

  
The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008. Fannie Mae's and Freddie Mac's stocks took a dive while their debt soared Monday, as investors bet the U.S. government's takeover of the mortgage finance firms would wipe out shareholders but fully guarantee their bonds.

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008. Fannie Mae's and Freddie Mac's stocks took a dive while their debt soared Monday, as investors bet the U.S. government's takeover of the mortgage finance firms would wipe out shareholders but fully guarantee their bonds.

REUTERS/Jason Reed

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

WASHINGTON - Not even the highest court in the land could decide the fate of America’s housing financiers, Fannie Mae and Freddie Mac. Investors in the companies, including Bill Ackman’s Pershing Square, had insisted Washington illegally confiscated their net income. What President Joe Biden ends up doing about the backers of half of the $11 trillion mortgage market will have bigger consequences.

Fannie and Freddie are unfinished pieces of the 2008 financial crisis. While Wall Street faced massive changes, the two firms have been under government stewardship since 2008, when they received a $187 billion bailout. In 2012, terms of their rescue were amended to force them to send all their profit to the U.S. Treasury. Several years later, those transfers exceeded the aid amount but weren’t considered repayments.

The investments made by Ackman, Fairholme Funds and others were always iffy. They were based on the belief that courts would agree that the government had overstepped its authority, an argument the Supreme Court rejected on Wednesday. Shares of the mortgage-finance firms fell by more than 40% after the decision.

While that crystallizes the picture for investors, Fannie and Freddie are still up in the air. With the Supreme Court also ruling that the structure of the Federal Housing Finance Agency, the conservator for the firms, was unconstitutional, the White House now has free rein to replace Donald Trump appointee Mark Calabria. He had pushed to end government control.

The previous administration had made strides toward that goal. It allowed Fannie and Freddie to retain some of their profit to start building capital buffers in 2017 before that cushion was slated to go to zero the following year. Last year, the FHFA finalized rules that would have allowed them to raise more than $200 billion for rainy days.

Biden’s focus will likely be on using Fannie and Freddie to boost home ownership. The liquidity provided by the two companies helps make the 30-year fixed-rate mortgage possible, a feature that has made Democrats reluctant to move on reforms.

That means ending government control is probably years away. Indeed, the median price for a new home jumped by 18% from a year ago in May to $374,400. With a boom like that, the Fannie and Freddie status quo is working just fine for Biden.

CONTEXT NEWS

- The U.S. Supreme Court ruled on June 23 that the Federal Housing Finance Agency had the authority to require housing finance firms Fannie Mae and Freddie Mac to hand over their profit to the U.S. government. Several hedge funds that are investors in the government-backed entities, including Pershing Square Capital Management and Fairholme Funds, have argued that the government acted illegally in taking that money. Fannie and Freddie, which received a $187 billion bailout during the 2008 financial crisis, have been under conservatorship ever since.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Rob Cox and Amanda Gomez) ((SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | gina.chon@thomsonreuters.com; Reuters Messaging: gina.chon.thomsonreuters.com@reuters.net))


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