The future of those historic linchpins of the US housing market, Fannie Mae and Freddie Mac, is looking increasingly uncertain.
Consider these two separate – though perhaps not unrelated – pieces of news.
On Monday, analysts at Moody’s said they expected the US government to decide within the next 18 months whether to wind down the government sponsored entities as losses mount.
From the report, emphasis ours:
Moody’s believes that there is an increasing likelihood that a new organization will be created to replace Fannie Mae and Freddie Mac for two reasons. First, as losses continue to mount, it will become clearer that it could take a decade or more of government ownership before Fannie Mae and Freddie Mac are viable stand-alone entities. Second, it will be politically untenable to resurrect these companies as a long-term solution to the mortgage market even with changes to their organizational structure and regulation. These companies have always been lightening rods for criticism and their continued existence would likely increase the resistance. So, in all likelihood a new organization, with a role similar to Fannie Mae and Freddie Mac though with a different organizational structure (i.e., not shareholder owned) will result
In the interim, Moody’s said, Fannie and Freddie’s profitability outlook “is bleak in the near to intermediate term”:
Since the third quarter of 2007, Fannie Mae and Freddie Mac have reported 7 straight quarterly losses totaling $86.9 billion and $63.7 billion, respectively. The primary drivers of the companies’ net losses were elevated provisions for loan losses, as well as mark-to-market losses on their securities portfolios and derivatives. The profitability outlook reflects the U.S. Government using these companies as instruments of public policy rather than profit maximization. Examples of their use in promoting public policy include the reduction of previously announced fee increases, as well as aggressive modification and re-financing programs. A recently announced program will allow refinancing of mortgages with loan-to-values of up to 125%. These programs are likely to extend the period of losses and the elevated levels of provisions at the companies
Second, and perhaps more importantly, various newswires on Wednesday reported James Lockhart, the regulator for Fannie Mae and Freddie Mac, would be stepping down “very soon.”
Here’s Reuters, which cited an administration official:
…no decision has been made about who might be a suitable long-term replacement, nor what role that person would have in shaping housing policy.
When asked by Reuters in an interview if he is leaving soon, Lockhart would not comment on any move but said he was proud of his work as a regulator and was looking forward to returning to private life.
Two strikes, or three if you count that epic weekend rescue last September.
Related links:
The purpose of Fannie and Freddie, bailout edition – FT Alphaville
Fannie and Freddie linkfest – FT Alphaville
Fannie, Freddie, now FHLBs? – FT Alphaville