Bankers urge government to pull plug on Fannie, Freddie

WASHINGTON Wed Sep 8, 2010 4:35pm EDT

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WASHINGTON (Reuters) - The federal government should take mortgage finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) off life support sooner rather than later, the Mortgage Bankers Association urged on Wednesday.

The bankers said Fannie Mae and Freddie Mac should move beyond the "conservatorship" that started two years ago and be placed "receivership."

"Fannie Mae and Freddie Mac have already moved well beyond the points where any other financial institution would have been put into receivership," MBA Chief Executive John Courson and MBA Chairman-elect Michael Berman wrote in a seven-page letter to the Federal Housing Finance Agency.

As the financial crisis unfolded in 2008, then-Treasury Secretary Henry Paulson effectively took control of the firms, although he stopped short of full nationalization by placing them in a "conservatorship" to keep them off the federal balance sheet.

The government controls 79.9 percent of Fannie Mae and Freddie Mac, just shy of the 80 percent threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase.

"The current situation is not unlike a brain dead patient who is being kept alive indefinitely by artificial life support," Courson and Berman wrote.

The mortgage bankers urged the FHFA to make it clear what would happen to the two firms so creditors will know who will be paid if and when they are put into receivership.

"What is paramount, however, is that FHFA protect all the cash flows associated with the (mortgage backed securities) from the demands of any other class of claimants," the bankers wrote.

The FHFA in July issued a proposed rule on how the entities would be placed into receivership and asked for public comment.

Treasury Secretary Timothy Geithner said last month the U.S. government's role in housing finance should undergo "fundamental change," but that it should still provide some guarantees in the $10.7 trillion mortgage market.

The House of Representatives Financial Services Committee has scheduled a pair of hearings later this month on the future of U.S. housing finance.

Fannie Mae and Freddie Mac -- recipients of $150 billion in taxpayer bailout money since being taken over by the Bush administration in 2008 -- pose a vexing policy challenge to the Obama administration as the November mid-term congressional elections approach.

(Reporting by Corbett B. Daly; Editing by Dan Grebler)

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Comments (4)
ethanb wrote:
Why should the government give up on Fanny/Freddie now? So that the banks can acquire trillions in loans at cents on the dollar? So that the middle class can be squeezed even more by Wall St?

No, now is exactly when the government should dig in. The concept of government subsidy for home ownership is a cornerstone of our prosperity. It is the 3-legged stool of mortgage subsidy, social security and medicare that has secured the middle class and extended it to millions of Americans. Those who would destroy Fanny/Freddie are out to enrich themselves and pauperize us.

Fanny/Freddie worked fine for decades, until the greed of Wall St. and lack of proper oversight destroyed them. The problem is not with the concept. The problem was with the execution. It is utterly amazing that at this time we keep hearing advice about limiting government from exactly those who brought about the financial collapse. We would be utter fools to listen.

Sep 08, 2010 6:07pm EDT  --  Report as abuse
Portland wrote:
I agree with you. It was the big banks that led us into this mess. Why trust them to get us out of it?

They want to destroy any chance that the middle class has to put a roof over their head at a decent price.

Move your banking to smaller regional banks and credit unions if possible.

Sep 08, 2010 11:47pm EDT  --  Report as abuse
eagleheartx wrote:
You have to put your idealogical hatred of “Wall Street” aside. The current model of the GSEs was developed during a much different economic era, when the private market was basically non existent. It is not applicable today. It worked when mortgage rates sky rocketed, and this is also not the case today.

Fannie, Freddie, and most importantly the model, are failures. This is not disputable. They offered securities which were free of credit risk to the investor, but not free of credit risk to the GSEs. When times were normal, this was manageable. Now with the historically high delinquency rate, the model has failed. The GSEs are costing the U.S. government 100s of billions of dollars to fulfill this freedom of credit risk to the investor.

To say that the GSEs played no part in the financial crisis is like turning a blind eye to the fact your child is a drug dealer.

-A Regulator and an Economist.

Sep 09, 2010 10:05am EDT  --  Report as abuse
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