Yesterday Freddie Mac announced that it would purchase "substantially all" of the seriously delinquent loans from their fixed-rate mortgage Participation Certificate (PC) securities.

The implications of the move extend well beyond the immediate effect on the investors in Freddie Mac securities. Of course, right away we’ll see at least some of the impacts of the FAS 166 & 167 rulings that my colleague Joe Murin anticipated in a post last month here on “Voice of Housing”.   As Joe pointed out, investors’ returns in these securities will be hit insofar as these repurchases will accelerate prepayment speeds, which will reduce the value of the securities to those investors.   

In the big picture, Freddie’s decision goes to the heart of the question concerning the future role of the GSEs – and dare I say relevance – in the US housing system as it is recast.

To be sure, yesterday's action by Freddie Mac comes only as a result of the US Treasury’s version of an explicit guarantee of both GSEs’ financial obligations.  Let’s not forget, by all measures both institutions are insolvent, and in the absence of the government’s intervention and guarantee, they would be unable to function as going concerns.  Look at it that way and today’s action by Freddie Mac, as a steward of billions and billions of taxpayer dollars, makes complete sense.  

The cost of repurchasing these loans today and holding them in the company's mortgage investment portfolio is likely lower than the cost of guaranteeing payments to the holders of the securities, including advances of interest at the security coupon rate. So as a taxpayer, I say, “Thank you, Freddie Mac!”

Against this backdrop, one wonders whether the investors in these securities – despite that fact that their yields will undoubtedly be hurt – warrant much sympathy. After all, for years both GSEs aggressively resisted all attempts to characterize their government guarantees as “explicit”, in order to avoid the regulatory scrutiny and oversight that would have resulted from such status.  In the face of those protests by the GSEs, and continual assurances of sound financial management and solvency, investors eagerly purchased securities from both of them.  

If these organizations had been truly private, these investors likely would have been wiped out when the GSEs entered conservatorship in 2008.  With yesterday’s announcement, we learn that those investors were actually pretty smart – they were betting, and obviously got it right  - that despite the government’s protestations to the contrary, Freddie and Fannie’s guarantees were actually explicit and unlimited in scope.   

So whom will these investors believe in the future?  If they believe neither the government nor the GSEs, then we all may have a great deal to fear regarding the future of the US housing system. To be perfectly blunt, private capital will not return, in amounts sufficient to sustain American housing at necessary levels, in the absence of clarity and improved investor confidence.  That absence is painfully present today.

Unless we agree that our housing finance structure of the future is a “national” function – run in large measure by the federal government and funded by taxpayers --- we are long overdue to begin in earnest the debate over the real future of this industry. The first, honest question of that discussion should be: Is there any role for left the GSEs?