Shaky Ground: The Strange Saga of the U.S. Mortgage Giants
Summary
Bethany McLean wrote this short book on Fannie Mae and Freddie Mac after they had spent several years in government conservatorship with no resolution in sight. Her question is what these institutions are, what they were for, and why nobody has been able to decide what to do with them.
The history covers Fannie Mae's creation in 1938, its partial privatisation in 1968 to move it off the federal budget, the resulting hybrid form with private shareholders and an implicit government guarantee, the growth of the retained portfolios, the accounting scandals of the early 2000s, the affordable housing goals, and the deteriorating credit quality of the loans they bought as private-label securitisation took share. She covers the September 2008 conservatorship and the terms of the government's preferred stock investment.
The legal and political material is the book's distinctive content. In 2012 the Treasury amended the arrangement so that essentially all the companies' profits would be swept to the government rather than paid as a ten per cent dividend, which occurred just as they were returning to profitability. McLean covers the resulting litigation by hedge funds holding the junior preferred shares and the disputed question of whether the amendment was a legitimate exercise of conservatorship or an expropriation. She also explains why reform has been impossible: the thirty-year fixed rate prepayable mortgage that American borrowers expect requires someone to bear the credit and prepayment risk, and no purely private structure has been shown to do it at the same price. The book is short and remains an accurate description of an unresolved situation.
Key takeaways 7
- Fannie Mae was partly privatised in 1968 to move its obligations off the federal budget, which created the hybrid form that failed in 2008.
- An implicit government guarantee let these companies borrow at near-sovereign rates while distributing profits to private shareholders.
- The 2012 net worth sweep redirected essentially all profits to the Treasury just as the companies returned to profitability.
- Litigation over the sweep turns on whether a conservator may act for the benefit of the government rather than of the institution.
- The thirty-year fixed rate prepayable mortgage requires a party willing to bear prepayment and credit risk, and no private structure supplies it at the same price.
- McLean argues that reform has stalled because no participant can accept a system in which mortgage rates rise.
- Affordable housing goals were a smaller contributor to the credit deterioration than the competitive loss of share to private-label securitisation.
Who should read it
Investors in housing finance and anyone assessing government-sponsored enterprise reform who want a clear account of an unresolved structural problem.
About Bethany McLean
Investigative business journalist; Vanity Fair contributing editor, formerly Fortune
The Smartest Guys in the Room remains the definitive account of Enron and her Fortune reporting broke the story before the collapse.
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