Mass Refinancing And Fannie/Freddie Stewardship

Mark Calabria offers the narrow technical argument against having the FHFA use its authority over Fannie Mae and Freddie Mac to promote large-scale mortgage refinancing. It’ll be bad for business:

First let us start with some basics about the Fannie Mae business. According to Fannie’s most recent 10-Q (see page 28), Fannie’s current interest-earning assets, mostly mortgages, yield the company 4.59%. However, Fannie has to fund those assets. The cost of Fannie’s total current interest-bearing funding is 3.99%, leaving the company a spread of 60 basis points to cover its non-interest expenses. What should be immediately obvious is that lowering the value of much of Fannie’s book to 4% will leave the companies with almost zero earnings. I’m not sure how that is supposed to get Fannie back on the path to repaying the taxpayer.

Several points in response. One, it’s not entirely clear that this kind of super-narrow focus is the appropriate vision of the FHFA’s role. The legislation that George W Bush signed into law creating the agency is quite vague, stating that “The Director shall have general regulatory authority over reach regulated entity and the Office of Finance, and shall exercise such general regulatory authority, including such duties and authorities set forth under section 1313, to ensure that the purposes of this Act, the authorizing statutes, and any other applicable law are carried out.” The stated purposes of the act are “To provide needed housing reform and for other purposes.” The FHFA’s mission statement says they’re around to “Provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market.”

To think about the logic of that for a minute, clearly the purpose of creating the FHFA and taking Fannie and Freddie into conservatorship can’t have been to minimize direct taxpayer financial losses on agency debt. You would accomplish that by pulling the rug out from under the implicit federal guarantee and letting them go bankrupt. But neither the Bush administration nor the Obama administration nor congressional leaders (nor even Tyler Cowen) thought that would serve the broader interest of the economy or the public. So given that the presumption for the conservatorship in the first place is that it serves the broader public interest, I’m not sure why FHFA’s implementation of that conservatorship wouldn’t also take that into account. Certainly large scale refinancing can easily be seen as part of “support[ing] housing finance and affordable housing, and support[ing] a stable and liquid mortgage market.”

Focusing more narrowly on taxpayer issues, if mortgage refinancing supporter broader economic recovery that will sharply reduce the federal budget deficit through a whole set of mechanisms outside the direct purview of the FHFA—higher tax revenue, less Unemployment Insurance and Medicaid disbursements, etc. Last, directly to the core point of FHFA, Fannie and Freddie are large enough players that they can arguably move the whole market. Stimulate the economy with large-scale refinancing, get the unemployment rate falling, and soon enough you’ll find that demand for houses is coming back and Fannie & Freddie themselves are saddled with fewer default losses. Meanwhile, even though Fannie & Freddie’s current cost of funds is low it’s actually a bit mysterious as to why it’s not even lower. Presumably the Treasury Secretary could “talk” these rates down by reiterating that the full faith and credit of the United States stands behind them and thus create a bit more headroom for mortgages.