The Treasury Department has been appropriating the two companies’ quarterly earnings, effectively stripping them of common equity and rendering them insolvent.
The step is just one of several taken by the federal government recently to take a dominant position in the mortgage market. Most prominently, the administration permitted brokers and bankers to get a cut from the banks in originating loans, which gave the former the means to take these mortgages into account on their balance sheets.
“Moreover, since Fannie Mae and Freddie Mac have tightened their underwriting standards the mortgage broker rapidly understands the easiest place to have a loan approved is to run it through the FHA
and sell it to Ginnie Mae – i.e., the government,” Rafferty Capital Markets vice president (equity research) Richard X. Bove said in an analysis for Value Walk
“In essence, lenders view Fannie Mae and Freddie Mac debt as debt guaranteed by the full faith and credit of the United States government,” he added.
Bove argued, however, that the controversy lies in how other politicians would react to the two companies’ bankruptcy—thus putting into question the viability of implementing this strategy over the long term.
“I would argue that if either of these companies were to seek money from the government during this Presidential election it would become an explosive issue,” Bove explained. “I do not believe that the current Administration could defend its actions in bankrupting both companies or in driving them into insolvency.”
“If Fannie Mae and Freddie Mac seek more money from the government, the lynch pin will have been pulled on the government owned mortgage markets. The little boy will have pulled his finger out of the dyke and housing will be inundated,” Bove concluded.
As part of its bid to stem the red-hot mortgage market, the United States government has decreed that Fannie Mae and Freddie Mac will no longer have capital by December 31, 2017, in what is shaping up to be a controversial issue for the coming elections.