Why Fannie and Freddie Should Exist in the New Mortgage Market

The beleaguered GSEs provide much-needed liquidity during market downturns.

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The Fannie Mae headquarters is seen in Washington. Fannie Mae earned $17.2 billion in 2012, the biggest annual profit in the U.S. mortgage giant's history.

They may be in federal conservatorship, but a funny thing is happening to the two "troubled" mortgage giants, Fannie Mae and Freddie Mac: They are making tons of money.

It's enough to give federal bailouts a good name.

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With double-digit home price appreciation and more buyers coming off the sidelines, there have been fewer defaults and more revenues on GSE (government sponsored enterprises) loan guarantees. That's translated into a handsome $17.2 billion profit in 2012 for Fannie Mae, while its twin, Freddie Mac, posted gains of $11 billion.

With these eye popping numbers, the game has changed. With profits expected to continue and even rise for the foreseeable future, it is now likely that the $180 billion in taxpayer funds used to bail out the GSEs will be paid back in the next few years. It also puts additional pressure on Congress to figure out the government's future role in housing, specifically as it relates to the GSEs.

But high-level conversations in Washington, D.C. about reforming (or replacing) the GSEs often center around financing challenges for single-family housing, overlooking the crucial role GSEs have played in commercial real estate lending.

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After the market bottomed out in 2009, the GSEs became a significant player in the issuance of commercial mortgage-backed securities (CMBS), keeping lending in the sector afloat during the worst of the housing bust. While losses from the single-family sector accounted for much of Fannie and Freddie's crisis-era financial carnage, the multi-family platforms remained in the black and had very low delinquency and default rates.

"Each Enterprise's multifamily business has weathered the housing crisis and generated positive cash flow," a recent Federal Housing Finance Agency report underscored.

As the broader housing market and economy have recovered, the GSEs continue to be a force in the commercial lending sphere. Fannie and Freddie accounted for almost $63 billion in multifamily lending in 2012, up from about $45 billion in 2011 and just $32 billion in 2010, outpacing private-label lending every year since 2009, according to the Commercial Real Estate Finance Council.

But the FHFA — Fannie and Freddie's regulator –recently announced plans to scale back their multifamily activity by 10 percent, which means the private sector will have to pick up the slack and provide $6 billion or more in additional lending. To be sure, the private sector's issuance of mortgage-backed securities has recovered significantly, and CREFC projects that private sector issuance will finally outpace agency issuance in 2013, though by a small margin.

The return of private-label lenders to the commercial market might provide a road map for how we structure the residential mortgage finance system of the future and what role the government might play.

[READ: Why Housing Wealth Matters for Seniors]

The big picture here is that the system worked. Faced with an unprecedented housing and financial crisis, the GSEs stepped up and played the role of countercyclical stabilizers. They supported a commercial real estate market that became one of the first sectors to recover.

All this has big implications for policy makers as they contemplate the future of the GSEs. If they are eliminated, or privatized, as some in Washington demand, who will supply liquidity to stricken housing and real estate markets when the next bubble bursts?

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  • Jason R. Gold is director of the Progressive Policy Institute's "Rethinking U.S. Housing Policy Project" and senior fellow for financial services policy. Keep up with his work at PPI here.