The powerful remarks
At a recent speech at the National Housing Conference Annual Policy Symposium, Mary Miller, the Treasury Department's under secretary for domestic finance, provided the Treasury's perspective on the two government-sponsored entities, or GSEs.
She highlighted the principles President Obama outlined almost a year ago, which were to "create a new housing finance system that better serves the needs of American taxpayers, borrowers, and renters," and she noted the difficulties that have faced the broader housing market over the past six years.
But her most sobering remarks about Fannie Mae and Freddie Mac came when she said:
Everything we are doing administratively is directed toward ensuring better outcomes for renters and homeowners, but these efforts attack only the symptoms of an unhealthy housing finance system. We need to address the underlying cause, an unsound business model where the majority of housing credit is backstopped by the taxpayer. The fundamental misalignment of incentives at the GSEs, where private gains were made possible through the public's risk of loss, helped exacerbate the crisis.
The troubling truth
Put simply, the U.S. Treasury Department, which has received $126.8 billion in dividends from Fannie Mae and another $86.3 billion from Freddie Mac, seemingly doesn't care about the businesses of Fannie and Freddie -- and their respective shareholders -- but instead, the broader outcome for the housing market.
As you can see, Miller even blames the massive losses and troubles Fannie Mae and Freddie Mac experienced during the financial crisis on the fact there was a misalignment of those who could reap the rewards -- shareholders -- versus those who faced the responsibility of possible losses: taxpayers.
Many, including billionaire Bruce Berkowitz, have called for Fannie and Freddie to be returned or reformed to allow shareholders to see the benefits of the business model that drives Fannie and Freddie.
Yet Miller instead argues that this is a fundamentally flawed system, and the purposes of Fannie and Freddie are not to benefit shareholders, but instead the broader American public through the housing market.
She went on to say:
Even if truly rehabilitating the GSEs were possible, recapitalizing them adequately would take at least 20 years. During these 20 years, the taxpayer would remain at risk of having to bail out the GSEs during another downturn. We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home.
Again, her focus was entirely on the risk American taxpayers face, and the purpose of Fannie and Freddie to assist in providing an ability for those who are able to purchase a home. If Fannie and Freddie are recapitalized and returned to private shareholders, there is huge upside for the shares. But if that takes 20 years, the actual gains (considering opportunity costs) will be much smaller.
The key takeaway
Of the 2,750 words Miller prepared in her speech, "shareholder" was never mentioned, but "taxpayer" was uttered eight times. Although she said that "there is no quick fix solution around this," we must see that the government group that runs Fannie and Freddie seemingly has no consideration for those who own the shares, which is a dangerous position to sit in.