The Contemplation of Fannie Mac or Freddie Mae
What I just typed was not a misprint. The two government entities assigned the task of creating a liquid mortgage market are Fannie Mae and its kissing cousin Freddie Mac. However, over the decades it has been extremely common for two entities operating in the same business sphere to find operating efficiencies by combining, merging, or marrying one another and becoming a colossus with even more market muscle than ever before. Accordingly, I thought of Fannie Mac. Some would prefer the name Freddie Mae. Others would want nothing to do with either name and just settle for a new moniker and leave the names of the past in the past. But what sense could be derived from the idea of a merger of the two mortgage behemoths. Would it make sense? It’s possible. Let’s consider why.
When two banks merge together the deposits grow, the balance sheet balloons in size, and market share normally takes a huge pop. This is almost applicable in any combination for rivals in the same business. The biggest advantage comes in the strategic analysis of both portfolios. The thought is to keep and grow the business of the more profitable and popular product lines while jettisoning the market losing divisions between the two. The chief source of immediate value is the reduction of back office infrastructure. Most mergers involve the consolidation and or shutdown of the GSA (general, servicing, and administrative) expense departments that cost that most to operate. Hence, there will only be one accounting, HR, IT, and training department on a go-forward basis. As such, many jobs will be lost, but there will be a commiserate jump in stock price as the bottom line is fattened, thus substantiating the rule of thumb that for every dollar in sales there is 10 cents retained, while for every dollar in expense reduced is one dollar retained. For these two giants, GSA expenses totaled $4.2 billion combined!
So in the case of Fannie and Freddie, many merger and acquisitions I-bankers, lawyers, and CPAs could see many of these same business principles being applied to the merger of the century…….or maybe of the merger of the country……a two trillion dollar merger! Fannie Mae does a good job with residential pricing for deals that push the envelope for borrowers with short employment histories. Freddie Mac does an amazing job in packaging and distributing loans to the secondary marketplace, especially on apartment buildings. Freddie may work better with the self-employed being more lenient with their documentation requirements. Fannie may get more deals done for the recently employed, like people who are fresh out of college. Fannie has more extensive IT infrastructure. Freddie has more extensive Wall Street contacts. Freddie Mac is in McLean VA, while Fannie Mae is located in the heart of DC. Like any good merger, we can see the strategic thinkers keeping the good, cutting the bad, and taking a wait and see approach on the “so-so.” Banks would only have one set of regulators to deal with, one set of guidelines to maintain, and only one securitization model to follow when dealing with Wall Street. The benefits seem like no brainers, but the politics are not.
As it is, we, the people, the American taxpayers own the entities. In spite of the fact that Fannie Mae and Freddie Mac taxed (no pun intended) the American citizenry to the tune of $188 billion for their bailout, they are still an intricate part of the American existence. In addition, as an enterprise under the conservancy of the United States, they are technically Federal entities. So the occurrence of layoffs at a long-standing “Federal” employer could be a public relations nightmare that could prove difficult to put a positive spin on. Fannie Mae has roughly 7,000 employees and Freddie Mac has approximately 5,000 team members. The thought of 4,000 – 6,000 government employees losing their jobs sounds like a small number in the day and age of a national economy that produces 200,000 jobs per month and has total workforce of 155 million people, but we normally don’t talk about the shutdown of an entity that finances half of the American dream. Congressmen from Virginia would be loathe to allow Freddie Mac to get shutdown and financial institutions across the land would lobby hard for their preferred GSE to keep its doors open. So a marriage made in heaven (on paper) it might be, but where rubber meets the road, it may not.
Do I think that it makes sense that we have only one national mortgage company…yes. The savings to the American people are immense. The logic of the elimination in redundant of operations is a no-brainer, but the politics are not quite as clear. If the speculation that congress will create a new entity to provide liquidity to the market shows no teeth, a merger is almost is inevitable, as the Federal government only needs one market maker for mortgages. It will be interesting to see if serious discussion arises for a topic such as this. The common sense for a Fannie Mac or a Freddie Mae is there, but for now, the political will is not.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.