NEW YORK (MainStreet) While mortgage guarantors Fannie Mae and Freddie Mac have turned profitable in recent months after its epic $187.5 billion taxpayer bailout in 2008, the future of these entities remains nebulous.
As home prices have recovered over the past five years, Fannie and Freddie are expected to send $202.9 billion in dividends to the U.S. Treasury by the end of March.
Still, lawmakers are trying to decide what role the entities will play in the housing market going forward. A bipartisan Senate legislation announced in March would install a new mortgage insurance system, instead of Fannie and Freddie, with greater reliance on private investors swallowing potential mortgage losses, instead of taxpayers and the government immediately stepping in during a future crisis. At this stage, it is unclear if the bill will gain enough political traction to pass.
The entities came under fire for their role in 2008 financial crisis, where subprime and sometimes fraudulent mortgages tainted the housing market, causing an economic house of cards to ensue.
Adding to the uncertainty of Fannie and Freddie is a pending legal battle. Shareholders have filed a lawsuit against the U.S. Treasury, in an effort to gain some of the entities' recent profits. As part of the 2008 bailout, the government was entitled to a 10% yearly dividend. Back in August 2012, a new deal was negotiated in which the Treasury was entitled to a 100% dividend, leaving shareholders with the short end of the stick.
Regardless of the shareholder battle, Fannie and Freddie remain an important part of the housing market. While the entities do not loan directly to consumers, they guarantee and securitize mortgages, packaging them into bonds and selling them to investors. This provides liquidity to the $10 trillion mortgage market.
"From a macro perspective, it's time to decide on the future of Fannie and Freddie, so the mortgage securities market has more certainty," says ITG chief economist Steve Blitz. "The uncertainty is hurting the flow of capital in the market."
While plenty of reform has been made to prevent another financial collapse, including measures to end the notion that banks are "too big too fail" (which is part of the Dodd-Frank legislation) and to prevent banks from gambling with its own money (known as the Volcker Rule), lawmakers have yet to address Fannie and Freddie until recently.
"One of the problems with the economic recovery is that there isn't clarity going forward over what the mortgage market will look like will it be Fannie, Freddie or something else in the future?," Blitz adds.
Uncertainty is difficult to measure and brings extra risk for investors, which could cause much needed capital to remain on the sidelines, instead of working to the economy's advantage.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE