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Corker-Warner Windfalls For Fannie Mae Investors

|Includes: Fannie Mae (FNMA)

On April 2, 2013, U.S. Senator Bob Corker, R-Tenn., a member of the Senate Banking, Housing and Urban Affairs Committee said: "I'm glad Fannie Mae is showing an increase in income, but we have to remember that this is largely because we have crowded out private capital and made Fannie or Freddie the only viable execution option for new loans. So while I am hopeful that taxpayers can quickly be repaid for their investment in the GSEs, we must focus now on building a more sustainable 21st century system of housing finance that restores the private mortgage market after years of government dominance. I hope Congress will take the necessary steps to ensure housing finance reform can happen as soon as possible." (

On his own website, U.S. Senator Mark R. Warner (D-VA) indicated: "Moving forward, I will continue to participate in hearings and discussions about how to foster sustainable recovery in our housing market. An important part of that debate is determining the appropriate role of the government in our housing finance market. The current financial state of Fannie Mae and Freddie Mac is not sustainable. You can find the Department of Treasury's recommendations for the future of the housing finance market at I look forward to thorough debate of this report as Congress considers options for improving our housing market for the long term." (

These are the publicly announced official positions of Bob Corker and Mark Warner: Bob Corker is prone to a private sector solution to the US housing system, while Mark Warner wants help for homeowners in danger of losing their home. When these two senators come to together, something beautiful can happen. On June 4, 2013, Reuters reported that U.S. senators mull timetable for liquidating Fannie Mae, Freddie Mac (, and the less informed analysts jumped out announcing that common share holders will be wiped out completely (CNBC offers a rather good collection of these opinions at:

But careful observers and seasoned investors see things differently. As in a typical Capitol Hill game, serious politicians always start with something beyond what they truly want to get at the end. In this particular case, what would Bob Corker and Mark Warner truly want to get at the end?

For Mark Warner: he wants subsidies for his constituencies: less privileged home owners, but this can be very unpopular if taxpayers have to pay for it in one way or another. The huge loss expected at FHA (see the report on June 6, 2013 at CNBC: is gravely compromising his chance of securing more funds for homeowners from a new pure publicly-financed house agency, i.e. FHA. Given the political resistance from the other Party to subsidies in every future year, less privileged homeowners will more likely receive less assistance than under the pre-crisis public-private partnership model of Fannie Mae. Mark Warner is likely already prepared to make compromise if a new Fannie Mae can be secured to continue to provide assistance to the needful.

For Bob Corker: he wants to bring in private capitals, but also very well informed about the performance of the private sector in the housing system. The creation of Fannie Mae during the Great Depression already offer convincing testament that a purely private system can become a great disaster for the market economy. A recent serious study (please read: has shown a better performance of Fannie Mae versus private counterparts. Taxpayers would have had to inject over US$175 billion into a private system that would play the role as Fannie Mae did during the past great recession. Remember, only US$117 billion was required for Fannie Mae - one third lower than a private alternative. Fannie Mae is also playing a great undeniable during the housing recovery, which cannot be expected from a private alternative as a private alternative would have to wait for more housing certainty. But Bob Corker's cause can be better served by bringing private capitals into Fannie Mae than through an untested new private system. Apparently, Bob Corker is likely already prepared to make compromise if a new Fannie Mae can be secured with more space for private sector so that the more effective private sector influence can be exerted on a publicly-linked entity.

The current version as reported of Corker-Warner draft bill is at most a response to the darkest moment of Fannie Mae's history during the darkest time of the US economy since the Greatest Depression. But US housing does not need a support system that is only good for the darkest moment: it needs a system that is good for most of the time. Fannie Mae is not a perfect model when less well managed, but its problems and shortcomings have been made known, and solutions are also readily available. Unless Great Depression is preferred to Great Recession, there is no reason to return to the pre-1938 jungle at a time when Chinese economy is fast catching up.

So the merit of the Corker-Warner draft bill is to provoke reflections now, in order to boost further recovery of the housing market, and seek quicker politically and economically acceptable solutions. Its merit does not rest with the draft per se, since it is not in Corker's best interest nor in Warner's interest to pursue the proposal to liquidate the private-public partnership model of Fannie Mae.

The Corker-Warner effort should be appreciated by Fannie Mae investors for contributing to triggering the debate on Fannie Mae's exit from conservatorship to allow Fannie Mae to fully contribute to the housing market. If time is money, the potential earlier coming back into the market triggered by the Corker-Warner effort should be taken as to bring windfalls for Fannie Mae private investors.

Disclosure: I am long RDN.