by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The recent news from the two has been so encouraging that their delisted common shares are up about 500%; the price of their preferred stock has gained about 200%, as opportunistic hedge and mutual funds wager that the two will survive — albeit heavily reorganized and privatized — and eventually offer the kinds of big share payouts that investors reaped from American International Group (ticker: AIG), among other casualties of the financial crisis.
Don’t bet on it. There is little appetite in Congress or elsewhere to permit the two government-sponsored enterprises (GSEs) ever again to exploit their federal charters, with the cheaper borrowing costs and implicit government backstop of their obligations, to enrich shareholders and leave the American taxpayers to pick up the pieces when the model blows up. Two legislative proposals have emerged in recent weeks, one in the House and one in the Senate, that call for the agencies’ operations to be wound down, their charters revoked, and their remaining assets sold off in the ignominy of a receivership. In any event, it’s highly unlikely that the common or preferred shares hold any lasting value.
While the process will take some time, since no final legislation is likely to emerge until after the 2014 midterm elections, what is more probable than Fannie or Freddie’s revival is the emergence of a hybrid American mortgage system in which the government has a lesser but continuing role as guarantor. The private sector will play a bigger part, but will also have to assume more risk. One result for prospective homeowners: The rate for a standard mortgage will be higher, possibly a half percentage point or more than under the current system.