Fannie And Freddie Really Are Shrinking

Bloomberg reports some good news:

Fannie Mae, Freddie Mac and the Federal Home Loan Banks are paying down debt at a record pace, creating a supply void in bond markets that may have saved U.S. taxpayers $3.8 billion and corporations $230 million in borrowing costs.

This has some nice repercussions for the credit markets, but not everyone will be pleased.

Less "agency" debt written by these sources decreases the supply of debt in the market that investors can purchase. As a result, investors must look elsewhere. Consequently, yields have been decreasing on other safe debt, such as high quality corporate bonds and Treasuries. This is good for corporations and taxpayers, as companies and the government face lower borrowing costs.

Bloomberg quotes Peter Wallison for some additional insight:

"Everyone in the market knew the Treasury was having to pay more on its debt because Fannie and Freddie's debt was competing with it: If those issuances are reduced or eliminated it should save the taxpayers billions," said Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute in Washington. Still, "taxpayers are going to suffer huge losses on bailing out Fannie and Freddie, something in the $200 billion to $400 billion range," he said.

Certainly, taxpayers ultimately will pay a lot for the misdeeds of Fannie and Freddie, but this trend is still somewhat comforting. The agencies aren't growing:

This year, Fannie Mae and Freddie Mac haven't had to borrow as much because they are keeping investment holdings below government-imposed caps of $900 billion and as Fed purchases of $1.25 trillion of mortgage bonds limit their ability to make profitable trades.

We need to ultimately have private banks take the place of Fannie and Freddie in purchasing and probably ultimately securitizing high quality mortgages. Once the storm clouds pass, I hope that continuing to shrink these agencies will still interest regulators, but I fear they'll forget past mistakes.

Who might not be happy about Fannie and Freddie shrinking? Anyone who favors broader government intervention in the mortgage market. Currently, Fannie and Freddie's reduced role probably hasn't been felt much by the mortgage market, since demand is low anyway, and the Fed has been aggressively purchasing mortgage bonds. When the Fed program ends next year, however, it will be interesting to see how credit markets respond without Fannie and Freddie able to expand further.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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