NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has released a new research report entitled “A Short History of American Housing Finance.” The report makes the following key points:
- A number of observers have recently called for a renewed effort to resolve the status of Fannie Mae and Freddie Mac, which have been in a government conservatorship since the 2008 financial crisis. KBRA provides an overview of the history of U.S. housing finance with an emphasis on the credit standing of the government-sponsored entities (GSE) to better orient some of these discussion in coming months. We also ask the more basic question: were the GSEs ever really “privatized” decades ago?
- The decision to “privatize” Fannie Mae in 1968 was not so much about changing the nature of housing finance in the U.S. as it was an effort by President Lyndon Johnson to conceal the fiscal cost of the Vietnam War. Massachusetts Institute of Technology Professor Lester Thurow, in his 1981 book The Zero Sum Society, argued that “Lyndon Johnson tried to conceal the cost of the Vietnam War, to wage it without paying for it, and thus started the inflation that still afflicts us.” 1
- Because of the fact that the U.S. government has never “loosed dominion” over the GSEs, to paraphrase the U.S. Supreme Court, the assumption that Fannie Mae and Freddie Mac are private entities remains suspect in our view. The U.S. government has never relinquished effective control over the GSEs. Seen from this perspective, the ersatz private shareholders of the GSEs are not equity holders at all, but rather creditors, and should seek redress from the courts on that basis.
- As KBRA noted in our recent report, “Housing Reform 2017: Can the GSEs be Privatized?,” it is the fact of sovereign support, not the specific amount of capital invested in Fannie Mae and Freddie Mac, that gives the GSEs AAA credit standing and allows the U.S. housing market to operate each and every day. As we opined in January 2016, “true privatization of the GSEs that eliminates any government guarantee would fundamentally change the mortgage market.”
To view the report, please click here.
- Thinking About Dodd-Frank Reform
- Housing Reform 2017: Can the GSEs be Privatized?
- Welcome the Old Normal
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).
1 Lewis, Anthony, “The Real Budget Danger,” The New York Times, April 26, 1981