Privatizing Fannie Mae and Freddie Mac risks a return to the kind of perilous mortgages that helped cause the global financial crisis unless regulatory safeguards are kept in place, an affordable housing nonprofit said in a paper on Tuesday.
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"This is essential to averting the 'race to the bottom' that ultimately drove down credit standards during the run-up" to 2008, according to the paper by the National Housing Conference, a copy of which was seen by Bloomberg News.
Fannie and Freddie have been in quasi-government ownership since Congress established the Federal Housing Finance Agency in 2008 to oversee them after the housing market collapsed. Wall Street investors such as Pershing Square Capital Management's Bill Ackman have bought into the firms in the expectation of a windfall if they are no longer overseen by the FHFA.
The time has come to return the housing giants to private ownership, the NHC wrote, in part because the housing finance model operates under full government control and comes with taxpayer risk "in an increasingly politicized environment."
Enshrining safeguards can be done by tweaking the terms of the Preferred Stock Purchase Agreements, which govern the terms of the US's ownership over the two government-sponsored enterprises, they added. That wouldn't require asking Congress to pass legislation, wrote the NHC, whose Chief Executive Officer is David Dworkin, a former senior housing policy adviser at the Treasury Department.
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Federal Housing Finance Agency director William Pulte has said in recent interviews that the Trump administration is
The NHC wants any proceeds from selling the government's stake in the two firms to be used to fund affordable housing. At present, the law requires any funds from the sale of GSE stock to be used for deficit reduction, the organization wrote.
The paper also suggested that the board governance of Fannie and Freddie will need to be changed so that its members have a fiduciary responsibility to the shareholders of the companies.
