GSE Compression Into One Entity
Here’s one little thought before you sip that New Year’s champagne…
Because we appraisers sweat the details to provide credible valuations, we might miss the macro right in front of us.
A few months ago I suggested that the current pilot programs for wide-scale bifurcation assignments were “dead man walking” per suggestions and insider tips related to actions by the new head of FHFA. He has consistently mentioned his aversion to the additional risk taken on by the GSEs in public speaking. Yes there is already bifurcation out there, but nothing near the scale should bifurcation go mainstream (under false pretenses I might add.)
The GSEs remain in receivership yet specifically Fannie Mae still behaves more like a Wall Street Institution than a government-sponsored entity or an entity in receivership under the federal government that they are. Remember that Fannie has a cost advantage over other financial institutions because they have the implicit backing of The Taxpayer if the mortgage market goes south. Perhaps this is why they are more willing to take risks. The GSEs made that implied guarantee a fact in their 2008 bailout and they continue to push the risk envelope with their pilot projects.
Appraisers have felt that impact first hand with our continued, irresponsible, marginalization by the banking industry who is closely and necessarily aligned with the GSEs.
As a refresher, Fannie got into trouble because they chose to serve only one of their two masters (Freddie just follows the actions of Fannie) during the bubble: “The Shareholder”, and they forgot about “The Taxpayer” – that’s what got them into trouble in 2004-2006 and eventually, by 2008 they were bailed out by us, “The Taxpayer.” And then this.
And then there is this announcement made last week from Reuters: Freddie Mac offers early retirement to 25% of workforce
Why is a GSE trying to reduce its workforce by as much as 25%? Here are two potential reasons:
- Mortgage volume will collapse in 2020 and they are overstaffed – unlikely – rates aren’t going up in 2020.
- The FHFA is planning the merger of Fannie & Freddie, a goal; of the current administration.
If option 2 is the more likely, then it makes sense that any bifurcation pilot program – which is more expensive, less accurate and slower than traditional appraisals – is not a needed expansion of their risk profile before such a GSE merger is undertaken. A botched merger could bring down the entire economy so why would FHFA take that chance?
Ok, now sip your champagne!
Happy New Year!