It's the end of an era: Mortgage giants Fannie Mae
and Freddie Mac no longer will be traded on the New York Stock Exchange
. The Federal Housing Finance Agency made the request
. From now on, both government-controlled companies will be traded only on the much-smaller Over-the-Counter Bulletin Board.
But will borrowers affected by the change?
Wall Street insiders call it delisting. It's what happens to companies whose worth, in terms of their stock price, has collapsed with little hope of ever recovering. It's another way of saying a company is just about dead. The FHFA claims this is not the case in this instance.
Indeed, Fannie and Freddie may be dead to the New York Stock Exchange, but they are very much alive in the home loan business -- the vast majority all new home loans now receive a guarantee from Fannie or Freddie that pushes down the mortgage interest rate. So Fannie Mae and Freddie Mac are dead -- long live Fannie Mae and Freddie Mac.
What's really going on?
The answer is central to understanding what might happen to Fannie and Freddie once Congress finally gets around to reforming them, probably sometime next year. For better or for worse, reform may change for years to come the kind of home loans borrowers can get.
The government has seized Fannie Mae and Freddie Mac, and officials are now running the mortgage giants almost like government agencies. That makes Fannie and Freddie different from all the companies that received government handouts during the bailout season of 2008. Fannie and Freddie's owners are among only a few that lost their companies. Rather than being bailed out, these owners were thrown out of the boat.
This difference -- between a bailout and a seizure -- explains why so many of the bailout banks have returned their bailout funds to the Troubled Asset Recovery Program
, or TARP, but not Fannie Mae and Freddie Mac. Many bailout banks gave the government preferred stock in exchange for bailout cash. Now that these banks have recovered, the government is selling its bank stocks, often at a big profit. But with Fannie and Freddie stock delisted, it's not clear what the government plans to do with the preferred stock it holds in them.
Meanwhile, Fannie and Freddie actively are encouraging servicers to modify home loans that are guaranteed by Fannie and Freddie; that's in order to prevent foreclosures, often at a loss. Those come on top of losses already suffered by Fannie and Freddie because of delinquent loans, foreclosures, and bond speculation back in the boom years. The government already has put $145 million into Fannie and Freddie to cover losses at the two companies, reports the Wall Street Journal.
It's possible that "reform" of Fannie Mae and Freddie Mac simply will make it official, turning the companies into permanent parts of the federal government like the Federal Housing Administration or the Federal Home Loan Banks. Fannie Mae actually started as a government agency and operated for decades without problems until it was sold to private investors in the 1960s.
Reform also could put Fannie and Freddie largely out of business. One government official recently speculated that without Fannie and Freddie, interest rates would be higher and loan terms shorter -- but in exchange, he felt the housing markets would be more stable. However, that stability is not a sure thing. Most commercial real estate loans weren't guaranteed by Fannie and Freddie, but that didn't stop the commercial real estate finance system from collapsing in the crash.
However, there is a third, more dangerous option. Fannie and Freddie could go back to being giant private companies owned by investors but under the protection of the federal government. That's exactly what they were before the crash. Congress will be strongly tempted to do this because a sale of the cleaned-up companies would raise billions in the short term, helping to repay the taxpayers investment. But in the long term a sale would leave the companies vulnerable to repeating the past.
Once again Fannie and Freddie's profits would go to investors while the risk would likely hang over the heads of taxpayers. Once again Fannie and Freddie could be tempted stretch their housing mission and their ability to borrow nearly unlimited amounts of money into highly lucrative, highly dangerous territory, such as buying hundreds of billions of dollars in bonds using borrowed cash, as they did during the boom years.
For right now, however, the delisting is largely symbolic. In the boom years, the idea of a quasi-public company both helping borrowers and profiting from them seemed like a winning idea. But like so many other bubble-headed notions of the era, when this one popped, it vanished into thin air.