Paulson: The GSEs as Utilities

U.S. Treasury secretary Henry Paulson managed to shake more than a few feathers in the mortgage industry Wednesday, with a speech that suggested in part that the government consider turning Fannie Mae (FNM) and Freddie Mac (FRE) into public utilities, akin to power and telephone companies. “Government support [of mortgages[ needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes,” he told the Economic Club of Washington. “Any middle ground is a recipe for another crisis.” Prior to the government’s take-over, the “inherent conflict” in the structure of Fannie and Freddie was obvious, Paulson contended. “[T]he GSEs served both a public mission and private shareholders — they received public support but operated for private shareholder gain … returning the GSEs to their pre-conservatorship form is not an option.” That sort of policy decision won’t be Paulson’s to make, of course, since the outgoing Treasury secretary will be replaced on Jan. 20 by current New York Fed chief Tim Geithner. But Paulson outlined a utility-model for the GSEs that hasn’t been suggested in the past, likely in the hopes of influencing at least some debate over the future of Fannie and Freddie — and the government’s ultimate role in mortgage banking. “A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain,” Paulson said. Under this approach, Fannie and Freddie would be replaced by a private entity or entities, regulated heavily by a rate commission, that would purchase and securitize mortgages guaranteed by the government. The private organizations would not have investment portfolios, he said. The suggestions drew sharp responses from industry participants. “We have public utilities because of economies of scale in power and utility production and distribution and because everyone needs it,” Jim Vogel, head of fixed-income research at First Financial Capital Markets Corp., told American Banker. “So you need a common capital pool to produce utilities. I’m not sure how mortgages fit into any of those economic categories unless we’ve just changed the whole nation’s housing system.” Vogel’s remarks underscore what may be the core agenda difference between more than a few consumer groups and those in the industry: is housing a right for everyone? Or is it a privilege for those who have the means to afford it? Much of the lobbying sure to follow over the GSEs in months to come will center squarely on whatever vision for the nation’s housing system a particular group subscribes to. Other options for the GSEs Paulson discussed included nationalization, privatization and one hybrid approach; all are options that have been discussed before, and Paulson made it clear there are problems with each, at least in his view. Soon-to-be Treasury secretary Timothy Geithner and the new administration will need to decide if the government will explicitly back Fannie and Freddie debt and mortgage-backed securities, said Paulson. Doing so, however, would come with some hurdles; the Congressional Budget Office has already said in Sept. 2008 that it believes the GSEs should be incorporated directly into the federal budget. An explicit guarantee would likely force that to take place. Paulson also suggested that the Obama administration could use the GSEs to push mortgage rates down to 4 percent, but warned — as we have at HousingWire in the past — that doing so would require a huge issuance of new Treasury notes; he also hinted that the government could use such a program temporarily, as well. Of course, such efforts would require that the GSEs remain under government control, something Paulson doesn’t believe is feasible long-term. “Fannie Mae and Freddie Mac are in a temporary form that, while stable, cannot efficiently serve their Congressionally-chartered mission and protect the taxpayers’ investment over the long-term,” he said. “We took the right actions to meet a specific need at a specific time.” In other words: what happens next is a problem for the next guy. Read Paulson’s full remarks. – Paul Jackson contributed to this report. Write to Kelly Curran at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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