Letting go of Fannie and Freddie

Efforts to find a solution to the government-sponsored enterprises continue to spin in circles. This is especially frustrating for Federal Housing Finance Agency Acting Director Ed DeMarco and the CEOs of Fannie Mae and Freddie Mac. To date, the only meaningful change is the move to abolish bonuses for the chief executives. Sadly, this will only make things worse, as there is no one willing to do the job necessary to run the nation’s housing for $200,000 a year. Furthermore, it puts the decisions of GSE executives more at the will of Congress and helps politicians tighten control and exert more influence over the day-to-day activities. It would be interesting to see what more the CEOs of Fannie and Freddie could do without the federal yoke on their necks. Of course, there will be those willing to take the positions at any price, but the expectation of operations improving at the government-sponsored enterprises should not be increased on the back of lower income limits. The last few years proved that the executives of the GSEs are restricted by board members who represent the best interests of the FHFA. The reasons behind Freddie CEO Ed Haldeman looming departure remains speculative, but I would argue it has more to do with the board not allowing him to work than with a pending cut in pay — even though the latter surely doesn’t help. And we don’t have an idea yet who may replace Haldeman, just don’t be surprised if you get what you pay for. And as long as the FHFA remains conservator of Fannie and Freddie, the boards will continue to play it safe in other areas as well, presumably continuing to spend another few years doing little to bring real change. One issue that is a continued sticking point is the use of principal write-downs. DeMarco, Haldeman and Mike Williams at Fannie are all steadfastly against principal write-downs. Their reasons chronicled extensively in the pages of HousingWire magazine. To be clear, principal writedowns are not likely to happen while the GSEs are in conservatorship. The issue I have is that blanket write-downs are seen on one side as a moral right (borrowers) and on the other as a moral hazard (lenders). It is as if there is no in between. And this is a wrong assumption. Principal write-downs are, in fact, sadly a commonality in commercial real estate today. And this happens even in the commercial-mortgage backed securities space. No one likes them, certainly, but it remains a market reality. The $105 million One Pacific Plaza loan, for example, saw a principal reduction to bring it close to the appraised value at $47.3 million, according to Barclays Capital [stock BCS][/stock]. This larger bankrupt CMBS pass-through that collateralized the property, the Towers at Bella Terra in Huntington Beach Calif., once contained hundreds of loans from a variety of locations and asset classes. It, too, succumbed to many of the same issues the residential markets are seeing today: poor underwriting, underfinanced and overleveraged lenders and uncomfortably high loan-to-value ratios. Bella Terra became unwanted, a cast off. As an option of last resort, with every avenue exhausted, the special servicer reduced the principal by more than half. Many residential properties are also at a similar end of the line. The GSEs cannot consider principal reduction while in conservatorship. In fact, Fannie and Freddie have to write-off a significant portion of the unpaid principal balance after foreclosure. So that can be considered a form of principal reduction, just not to the benefit of the homeowner and leading to further potential investor recourse via the Treasury. It’s not a system for the $200,000 a year faint-of-heart. No one wants Fannie and Freddie to remain GSEs. Especially those who work there. However, recent decisions, mixed with political inaction in the areas that matter most, only seek to push Fannie and Freddie deeper into the federal billfold. A clear decision needs to be made to finally let go of Fannie and Freddie. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.