Thanks to the awe-inspiring ingenuity of political and financial people, backed by trillions of dollars in private and public spending, US housing finance is somehow even less sustainable than ever. This year’s political campaigns have made it clear that housing policy will continue to be twisted into an ever more complex knot of contradictions.

Homeowners demand refinance-able 30-year fixed mortgages made possible by imposing interest rate and credit risk on the taxpayer. Taxpayers do not want to pay to support the mortgage market. Homeowners and taxpayers are, for the most part, the same people. Investors want premium returns for housing finance without assuming all the commensurate risks.

The Trump administration, and many Republicans, want to get the government out of the housing finance business. That is, after they bail out legacy investors in Fannie Mae and Freddie Mac, the government-sponsored entities that support middle-class housing.

Democratic candidates demand affordable housing through the imposition of national rent controls and subsidised public housing. New York City has had both since the 1940s, yet is unaffordable for most working people.

Start with the Trump administration’s policy of “privatising” Fannie Mae and Freddie Mac. Oh, not really privatising, since their $6bn in market value of common equity is owned by private investors, along with $33bn of junior preferred shares. Yes, the Treasury owns $240bn of senior preferred, and “supports”, but not guarantees, their $5.47tn balance sheets.

Fannie and Freddie never went into receivership during the financial crisis . . . they went into “conservatorship” in September 2008 under their regulator, a sort of Sleeping Beauty state for their privately owned equity. At the time, this seemed like a good idea, since Republicans and Democrats could avoid the responsibility for an out-and-out bankruptcy.

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However, the common and preferred shareholders include well-financed and well-connected investors who have dragged the federal government through the courts to demand their money. They claim that since the Treasury has received $306bn of dividends on its senior preferred shares, the government has already been “paid back” on the $191.5bn of direct advances contributed as capital to keep the GSEs from collapsing.

Uh, not really. Dividend payments on the government’s senior preferred stocks (preferreds) are not principal repayments. The government financed the GSE’s return to profitability by buying their senior preferreds when no one else would inject new equity. The government also gave its implicit support to their borrowing and subsidised mortgage guarantees.

Now the common stock and junior preferred owners want the Treasury to write off the senior preferreds so they can reap the GSEs’ future profits. This pay-off to the specs is clearly unfair to the taxpayers.

The GSE equity investors’ persistence seemed irrational, until Donald Trump’s election and Steven Mnuchin’s appointment as Treasury secretary. In court and on the Republican side of Congress they are able to point to the internal contradictions of the conservatorship concept. They have an investment bank, Moelis & Co, to paper their case.

Over the somewhat muted objections of Congressional Democrats, the housing regulator and the Treasury are proceeding with a negotiated bailout for the GSE equity holders. Last fall, Mnuchin stopped the “sweep” of the GSE’s senior preferred dividend payments to the Treasury. Under the administration’s new policy, Fannie Mae would be allowed to retain up to $25bn in earnings, and Freddie Mac up to $20bn.

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This month, Fannie reported $14bn in retained earnings and Freddie $19.1bn. This would suggest that both will meet the administration’s capitalisation targets by the third quarter. Under the current plan, that would suggest that a bailout for the equity holders could be arranged before the November election.

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However, it seems to have dawned on everyone “in the room” that a $40bn-plus payout to Wall Street speculators would be a bad look. So the i-dotting and t-crossing has been postponed, almost certainly until after the polls have closed.

If Trump wins, the preferred holders hope for at least a double from today’s share price. The common shareholders are even more giddy at the prospect. If a Democrat is elected president, the equity holders would be looking at a write-off.

Whoever takes office, it seems implausible that there can be a sustainable fix for US housing finance before the next downturn.



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