By CHUCK GREEN
Back in 2008, Fannie Mae and Freddie Mac were in trouble. In fact, without government intervention, they faced imminent collapse, and on Sept. 6 of that year, both were placed in conservatorship by the director of the Federal Housing Finance Agency.
With those conservatorships hitting their 15th anniversary, William Emmons, an adjunct lecturer at Washington University in St. Louis, said the takeover was historically significant because they were the first large-scale government interventions in what came to be known as the Global Financial Crisis.
“In other words, their collapse was a bellwether of things to come. Lehman Brothers failed one week later, which triggered the chain reaction of collapsing banks, AIG, and market confidence,” Emmons told The Mortgage Note.
Furthermore, “the conservatorships represented the first significant nationalizations within the financial system since the Great Depression.”
When Fannie Mae and Freddie Mac began to operate in a sound manner, the financial system as a whole became more stable, Emmons said, but he added there have been drawbacks. Most notably, the conservatorships, designed to be temporary, have remained in place for 15 years with no changes in sight.
“The lack of a permanent resolution to the GSE crisis is itself somewhat unsettling. Institutionally, the conservatorships are probably not as stable and solid as one would like,” Emmons said.
Donald Layton, senior visiting fellow at NYU Furman Center, told The Mortgage Note that “the legal intent of conservatorship is to provide a mechanism for a financial regulator to avoid putting a failing firm into receivership by instead having it continue to operate, albeit under the control of the regulator.”
“It’s an option available broadly among financial regulators, not just the FHFA,” he said.
Layton explained that in 2008 it was determined that if Fannie Mae and Freddie Mac failed, it would have negatively impacted mortgage assets and caused a further deterioration of general market confidence in large financial institutions.
Conservatorships, however, are meant to be a short-term solution, he said.
“In fact, many of the major policymakers involved over the years stated that conservatorship wasn’t designed to last a long time — and so exit from conservatorship should be a priority,” Layton said.
The lengthy conservatorships illustrate what happens when regulators ignore the will of Congress, according to Mark Calabria, a senior advisor to the Cato Institute.
“Upon their failures in 2008, both companies should have been taken into receivership, as Congress so clearly directed. We could have avoided 15 years of limbo and increasing taxpayer risk – not to mention the hundreds of millions spent on legal fees, while also curing the worst features of the GSEs – their so-called implied guarantee,” Calabria told The Mortgage Note.
What’s happened has left taxpayers and the financial system exposed, Calabria said.
“It’s injected even more politics into our mortgage finance system. The status quo has also not reduced costs in the mortgage market, with mortgage spreads and costs currently at historic highs. It is far past time for the law to be implemented as written,” Calabria said.
All that said, without the conservatorships, Emmons doesn’t think it would have been a particularly pretty picture.
“The Global Financial Crisis presumably would have been worse. In particular, the mortgage markets would have become more fractured, illiquid, and expensive for borrowers. The 30-year mortgage would have disappeared,” Emmons said.
Furthermore, the housing market crash probably would have been deeper and more prolonged. “It might not have been possible for fiscal and monetary policies to restart economic growth for several years. We might have entered a new economic depression.”
Paul Manchester, former principal economist at the Federal Housing Finance Agency, said there are lessons that can be learned from the takeovers.
“One lesson is that it is dangerous to have such a large part of a sector of the economy controlled by only two firms,“ Manchester said. “If we had 10 firms in the secondary mortgage market instead of a duopoly, some might have been more prudent and would have survived.”
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