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US seeks to privatize mortgage giants a decade after market meltdown

US seeks to privatize mortgage giants a decade after market meltdown

WASHINGTON, Sept 11: A decade after the mortgage bubbleburst sparking the Great Recession, President Donald Trump wants to privatizetwo financial linchpins of the multi-trillion-dollar American housing sector, reports AFP. In Senate testimony on Tuesday, US Treasury Secretary Steven Mnuchin laidout the administration's reform plans for housing finance, including thegovernment-sponsored enterprises known as Fannie Mae and Freddie Mac. "In their current form, Fannie and Freddie are still too big to fail,"Mnuchin told lawmakers, saying their size and importance created liabilitiesfor the financial system that could require another unpopular taxpayerbailout. The two organizations - which together back about half of all USresidential mortgages - were placed under conservatorship, or effectivelynationalized, during the mortgage meltdown of 2008.A $190 billion government bailout that year saved the two entities, asdefaults by risky so-called sub-prime borrowers soared nationwide.Little understood by the general public, the two institutions do not infact originate mortgages. Rather, they pump liquidity into the housing sector by buying mortgagesfrom banks and then packaging them as securities that they can either keep orsell onward to investors with an implicit guarantee.This system eases the financing of long-term lending such as 30-yearmortgages, which are rare outside the United States but have been key toachieving the "American dream" of homeownership. At the moment of the housing market's collapse, the home ownership ratehad hit 70 percent before tumbling as foreclosures swept the nation.Also testifying Tuesday, Mark Calabria, director of the Federal HousingFinance Agency, said a 25 percent decline in the housing market would cause$43 billion in losses for the financial institutions. "In their current financial condition, the enterprises are not equipped towithstand a downturn in the housing market," he said.The two are allowed just $6 billion in capital reserves despite owning orguaranteeing nearly $6 trillion in mortgages, he said. In a report last week, the US Treasury laid the groundwork for reforms tothe two institutions, long a policy goal of the Trump administration.Even though Fannie Mae and Freddie Mac are hybrid bodies traded on WallStreet, because of the conservatorship, their dividends are paid into theTreasury - something private investors would love to change. As the real estate market has recovered and grown stronger in recentyears, Fannie Mae and Freddie Mac - whose familiar names arise out theabbreviations for Federal National Mortgage Association (FNMA) and theFederal Home Loan Mortgage Corporation (FHLMC) - have sent their robustprofits straight into the government's coffers.In all, since the federal takeover, they have sent $300 billion totaxpayers, more than repaying the cost of their bailout. The Mnuchin reform plan involves dozens of proposed legislative andregulatory measures and aims first of all to recapitalize both organizationsby allowing them to keep some of their profits.This should create a capital cushion to protect them in the event ofanother mortgage catastrophe, officials believe. In effect, the Treasury wants to end the tacit government guarantee -which more or less required the original bailout - and instead plans tocreate a guarantee that is both explicit and already paid for, which willapply to some mortgage bonds. According to Mnuchin, a reformed federal housing finance system will alsoboost economic growth. Once a Goldman Sachs executive, Mnuchin is also a former mortgage banker,having taken over the California bank IndyWest, renamed OneWest, during thecrisis. The release of the housing finance reform plan comes as shareholders beginto make progress in a legal battle to stop the government's collection ofFannie Mae and Freddie Mac profits.A federal appeals court last week overturned a lower court finding whichhad supported the government policy - something Mnuchin told CNBC on Tuesdaythe administration could appeal to the Supreme Court.

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