El futuro de Freddie Mac y Fannie Mae

freddie_mac_fannie_mae.pngLeo en NYT que en USA se estudia que el gobierno se haga cargo de las dos mayores agencias públicas hipotecarias para rescatarlas de la insolvencia.

En 2003 esta era mi opinión de ambas, y de lo que se debería haber hecho con ellas:

QUESTION # 8: What should be done about GSEs?
The Government Sponsored Agencies (GSEs) are basically two: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both play almost the same role in the mortgage market though Fannie Mae is closer to the VA (Veteran Administration) and to the FHA (Federal Housing Administration), its originally exclusive clients (now there is freedom to chose, but the trend persists). Additionally the Federal Home Loan Banks, especially Chicago’s are becoming to play a similar role to that of the two main, pure GSEs.

Fundamentally, the reasons because these two agencies were created are:

  • Long-term hedging (or diversification). Mortgage securisation under US federal government  guarantee allows the banks to offer products more convenient for the population that were not  available before. Specifically that allows offering long-term, fixed-rate mortgages at a reasonable  cost. Scholars such as Anthony B. Sanders20 argue that this function can be perfectly performed by  financial institutions as well. Others do not see that so clear: the huge volume of the assets and the  maturity of them make banks think it twice before investing. For example, Spanish bank system  and institutions are well known for their excellence and performance. But they are not keen of  fixed rates (at least in large proportions) and thus mortgages in Spain are 95% floating type. Taking  into account that around 90% of houses are in property and that people dedicate a great deal of  their rents to serve the debt, a hike in interest rates might cause a dramatic crisis in the national economy, and in the society too.
  • Value-Chain specialisation. These two agencies allow banks to focus on mortgage origination, and customer satisfaction without having capital constrains for that. In other words, there is a split of the value chain activities that permits a higher degree of specialisation that potentially would benefit the performance of the entities and of the economy as a whole.
  • Social policy tool. GSEs are very powerful and effective policy-making tools. For example, Fannie Mae and Bank One have partnered to launch a special program to allow disabled Chicagoans to qualify for a mortgage21. GSEs can make positive-action policies reality in a very actionable, simple and direct way.

However, the functioning of GSAs over the years have let the public to observe their operating issues,

some of the of great importance and dangerously growing. The main issues are:

  • Principal-agent problem. Latest accounting problems can be nothing but the peak of an iceberg. In the deeper part of the iceberg there would perfectly be special treatment to some institutions in expense of others, making-up the real social impact of the agencies, nepotism, electoral campaigns, etc. Even though almost nothing has been proved, the list is vast enough, and the GSEs are big enough (among the largest companies in the worlds by assets) as to seriously
    worry about that.
  • Value transfer. There is an implicit value of the federal guaranty in the loans. The value of that guarantee must be enormous. Many people outspeak against private investors taking advantage of that guarantee.
  • Adverse selection problem (Lemons problem). Currently GSEs not only “buy” the interest risk, but also the credit risk. And the pricing model consists in paying a flat fee for this risk whatever the real credit risk of the originator is in the future. This is very harmful to the banking system because banks, thrifts and other lending institutions would relax their credit scorings (considered by many the core lending activity). The problem is not that they can relax, but
    rather that they will relax. Originators are in fact encouraged to attract bad new customers with cheap mortgages. Then, the originator would cross-sell a myriad of financial products (credit cards, deposits, funds, etc), making a profit without suffering the downside, that is in the GSEs’ side.
  • Investors expectations. From the investors stand point the issue is as follows: why shall I invest in a company whose decisions are not entirely aligned with the profit-making assumption? Broadly speaking, the return on companies investment depends on the set of decisions taken under a high degree of uncertainty. However, in the case of GSEs the profitability is marked by decisions taken under a high degree of certainty. We know that if tomorrow GSEs decide to aggressively expand their activities -even more- investors are going to suffer the worse credit conditions (unless GSEs decide to compensate them by other means). This sort of zero-sum game makes the GSEs and the federal government (which in fact are the virtually same) can perfectly draw the agencies returns for the next years. This contradicts the very deep spirit of capitalism where an investor is rewarded for the risk he or she takes, and for how he or she manages that risk. In summary, there are high capitalistic concerns in these types of companies.

Given the formerly pros and cons of the GSEs, many people have been trying to modify certain aspects of them. Either complaining in Washington or, like Alex Pollock, president of the Federal Home Loan Bank of Chicago (FHLB of Chicago) by trying to convert FHLBs into secondary mortgage players. The FHLB of Chicago launched a formidable successfully secondary mortgage programme. Its success stems from the fact that it does not buy the credit risk. Actually, it pays a
flat fee to the originators for keeping that, leaving any credit-scoring gain to them as an incentive. What is happening now is that the big GSEs are getting the “apples” while the FHLBs are getting the most profitable clients. For instance, the same Bank One we mentioned before has signed an important long term agreement with the FHLB of Chicago for its normal business.
In my opinion, all this facts lead to the following should-be decisions about GSEs:

  • The mission has to be redefined. I would lean to its social dimension (positive action) such as ethnic minorities, the disabled, and single-parent families. I would withdraw the goal of just promoting more rates of home ownership because the rate is already enough, and because there is no direct correlation between home ownership and welfare, or social happiness. Germany might be a good example of that.
  • I would progressively empty the equity role of the agencies. In other words, In the long-term I would like to see the agencies as mere packers (including federal guarantee) and distributors of securities. Not as the remaining equity of the security. In more technical words, I would encourage the issuing of pass-trough securities (or even collateralised mortgage obligations if the last trench is not subscribed by the agency) instead of bonds. That would solve part of the
    investing arbitrariness pointed out above. Also that would lead in the long-term to the withdrawal of the agencies from the stock exchanges (not an easy step). On the other side, investors would have the opportunity to invest in securities with complete, permanent information about them. For example “mortgages for general public in Tennessee between 2005 and 2007 under XYZ conditions”, or “mortgages for Hispanic minority in southern California under ZYX conditions”.
  • I would adopt the FHLBs pricing system, leaving credit risk to originators. I would complement this measure with another one setting different credit risk fees for different programs. That way we would not discourage the purchase of securities related to less profitable areas or segments of population. I.e. the agencies have to recognise the fact that different programs have different credit risk, but they leave the individual scoring (deviations from the mean) to originators.
  • Finally, something has to be done about corporate governance. It is always easy to give few tips that would put patches in bad practises, especially in the latest, more public-sensitive ones. That has proved not to be very effective over time, especially taking into account that the designers and implementers of the measures are indeed the very same people under scrutiny. Instead I would argue to let the FHLBs to play in the market under the same conditions as the current incumbents (basically letting it re-selling the securities). It is not a matter of competition (as Mr. Pollock defends, virtually we are passing from 2 players to 3), it is just to introduce a new player that in my opinion have much higher standards of corporate governance, setting up a sort of role model in the industry. What causes that “best practice” is the role of the program members in the supervision of the FHLBs. Such fragmented, assorted pool of supervisors is the best long-term guarantee against bad practices.

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