GSE Critics Ignore Credit Market Data

In theory could you have private ownership of the GSEs? Yes. But we treat them as sovereigns right now. They are triple-A credits. So the moment you convince the bond market they are no longer a fully supported by sovereign entities, the U.S. Treasury. I think the nature of their operations will change. The spreads will change and the cost of loan to a  consumer will change. How you do that is a complicated thing.

Also:

I don't think you can make a partially privatized Fannie and Freddie work if you have to saddle them with the cost of policy. In other words, if you force them to continue the same affordable housing role they have now, how are you going to make that work?

In other words, Whalen has a hard time imagining how housing finance operated over the past several decades.

GSEs Without A Government Guarantee

And the moment you convince the bond market that they are not fully supported by sovereign entities, you return to the status quo ante, which worked without disruption prior to September 6, 2008, when the government ambushed the companies with its planned takeovers.  (Federal reserve economists and others who deny that fact, and say the GSEs had difficulty accessing the unsecured debt markets prior to that date, are lying.)  

It's also worthwhile to put the credit markets in some context.  Credit spreads--both spreads over Treasuries, and spreads between, say, double-A credits and triple-B credits--widen and narrow depending on overall market conditions. 

As we can see, credit spreads among all forms of short-term debt were very tight before and after the crisis years of 2007-2009. The price of one-month unsecured commercial paper was almost indistinguishable from Fed funds, which are secured by cash held at a Federal reserve bank. For over a decade now, GSE critics have railed against the GSEs' unfair funding advantage as an excuse to explain why private banks cannot compete with the GSEs in selling 30-year fixed rate mortgages. Historically, that funding advantage was less than meets the eye. 

A closer look at the credit spreads during 2006 - 2009 shows that, prior to September 2008,  Fannie's 90-day discount notes were priced cheaper than three-month Libor. This  "unfair funding advantage" over banks, which GSE critics frequently cite, tends to disappear when you consider that a bank's cost of consumer deposits is always cheaper than Treasuries. 

We can look at Fannie's credit spreads over Treasuries during the many years it operated before and after the government takeover.  Before the takeover, its 90-day cost of funds over Treasuries hovered in the neighborhood of 20 basis points. GSE critics offer zero evidence to show why that spread might change post-conservatorship. 

The Cost To The Borrower

The chart above covers the period of January 1992 through September 2016. It illustrates how 30-year FRMs have always tracked 10-year Treasuries. Over the decade prior to the government takeover, the price of 30-year FRMs averaged 182 basis points over 10-year Treasuries. From September 2008 through September 2016, 30-year FRMs averaged 172 basis points over Treasuries, although the credit quality of FRMs mortgages financed by the GSEs has improved considerably.

GSE critics have offered no data to suggest that the cost of mortgages will dramatically change if the GSEs were released from conservatorship. 

Privately Owned GSEs And Affordable Housing Goals

Whalen finds it hard to imagine that privately owned GSEs, which are subject to affordable housing goals, might work. That's because he chooses to ignore history. 

Look at the charts below, which are published every year by the GSEs' regulator.  They show how affordable housing goals, which were first set in 1992, impacted the performance of the companies' overall loan portfolios.  In terms of the metric that matters most--getting your principal back with interest--no other mortgage lender, anywhere, has come close to matching the success of the GSEs. 

Whalen, like so many GSE critics, refuses to discuss GSE loan performance in the context of the overall market, and instead likes to insinuate all sorts of things that are not true. The case against the GSEs has always been based on smoke and mirrors.

As for the housing housing bubble and the ensuing crash, it takes a bit longer to explain why they were caused by the epidemic of fraud in  private label residential mortgage-based securitizations.   

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