After the bailout: few fans but no fix for Fannie and Freddie

WASHINGTON Mon Apr 23, 2012 1:08am EDT

U.S. Housing and Urban Development Secretary Shaun Donovan announces February 9, 2012 in Washington that the federal government and 49 state attorneys general have reached a $25 billion agreement with the nation's five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses. REUTERS/Gary Cameron

U.S. Housing and Urban Development Secretary Shaun Donovan announces February 9, 2012 in Washington that the federal government and 49 state attorneys general have reached a $25 billion agreement with the nation's five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses.

Credit: Reuters/Gary Cameron

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WASHINGTON (Reuters) - In considering how to fix the ailing U.S. housing market, Republicans and Democrats in Washington have found a rare point of agreement: they would prefer life without failed mortgage giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

But even with agreement that the system is broken, it is unlikely Congress will soon tackle the mammoth task of winding down two entities that have cost taxpayers more than $150 billion since their bailout in September 2008. Fannie and Freddie now support about 60 percent of all new U.S. home loans.

Already, lawmakers have taken tentative steps to scale back Fannie Mae and Freddie Mac's involvement by reducing the size of loans that they can guarantee. Republicans and Democrats have unified behind preserving affordable homeownership.

But more dramatic actions could be politically treacherous in an election year. Home buyers still rely on the government backstop in nine of 10 new mortgages, and the fragile market must be weaned slowly from its dependence on federal programs providing financial backing.

Changing the present system might prove hard for lawmakers who are wary of risking harm to the housing recovery. Some would fear alienating the deep-pocketed housing lobby and various consumer groups rallying around the issue.

"There's not a politician out there who is willing to take the risk of proposing something with a short transition period that would potentially be blamed for cratering the housing market," said Douglas Elliott, a Brookings Institution fellow and former investment banker.

The Obama administration will release an updated plan in coming weeks that is expected to further define its goals for the federal government's role in the housing finance system, according to sources familiar with the matter.

The administration in February 2011 offered three big-picture options for overhauling the mortgage market.

One would be to eliminate federal involvement altogether, but most experts say this could upend the housing market.

Another option creates a system that would help some types of low-income and veteran buyers and also provides an expanded guarantee the government would offer mostly in times of financial distress.

A third would include government reinsurance for some types of mortgages, but only if lenders first purchased a guarantee from a private insurer.

The administration has not endorsed a legislative plan at this point, but continues to consider these options, according to a U.S. Treasury official.


Susan Wachter, real estate and finance professor at the University of Pennsylvania's Wharton School, believes the time may have come for "testing the withdrawal of a fully federalized system."

"It's untenable for the U.S. to continue on a path in which we rely on a federal housing finance system," she said.

But with the November elections looming, congressional action could be elusive, leaving the two government-run firms to limp along under federal conservatorship.

"Anywhere we move from here in terms of supporting the housing market will be more expensive, so politically there will be pushback - which means there is a danger that we will settle in with the existing system for many years," said Elliott.

It could take years to construct a new housing system that would preserve some of the benefits of Freddie and Fannie, including making home ownership affordable. The entities do not issue mortgages; they buy loans and repackage them for sale to investors as mortgage securities, with a guarantee in case a borrower defaults.

"Nobody is suggesting that we downsize the GSEs(government-sponsored enterprises) overnight. We have always said that it will need to happen over time," said U.S. Representative Scott Garrett.

Garrett, a Republican member of the Financial Services Committee, has taken a lead role on housing reform in the U.S. House of Representatives. He has offered a handful of bills in the House, aiming to end taxpayer support of the GSEs and wind down the companies that helped fuel the housing bubble before collapsing under investments in subprime mortgages.

The U.S. Senate, meanwhile, has shown little inclination to take up the issue any time soon.

Treasury Secretary Timothy Geithner this month said the United States is lagging on reform of the housing finance system, which he called the "biggest source of unfinished business in the financial reform effort."

In February 2011, Geithner predicted it could take five to seven years to transition to a new housing-finance system.

Garrett argued that Geithner "has shown absolutely no interest in trying to figure out a future for housing finance and resolve what will happen with Fannie and Freddie. It just hasn't been an important item on his agenda."

Investors still haven't shown that they can do without a government guarantee, said Lawrence Yun, the chief economist for the National Association of Realtors.

Yun said that relying on big financial institutions to insure mortgages and provide less government support could result in restricting capital and threatening market stability.

Realtors and community bankers have lobbied to maintain a strong federal role.

"Without the government backing the residential mortgage market could be subject to a potential credit freeze and mortgages might not be available, which I don't think elected officials want to see," said Yun.

"Given the mistakes by Fannie and Freddie - trying to chase after wild profits in the boom years - to restrain them is understandable. But one has to consider is what worked with Fannie and Freddie and what didn't," he said.

(Editing Marilyn W. Thompson and Doina Chiacu)

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Comments (8)
stanmill wrote:
im in real estate…
increase the down payment to 5 or 6 per cent.
no sellers contributions for costs.
change foreclosure law for shorter time period
and do away with stalling tactics.
have one-half of one percent of payment
for first three years go into an insurance fund
for losses on other loans
this will not kill the business,
it will enhance the business

Apr 23, 2012 3:25am EDT  --  Report as abuse
moxsee wrote:
The Macs have little motivation to make sure the loans are successful. Loan services and banks buy the loan and they have one motivation, make money. Through foreclosure, late fees and loan flipping whatever produces the highest return. In return, the Macs are getting steam rolled for backing loans and forgetting to protect their interest. When it is your money you should know who has it and what they are doing with it. Classic example of tax payer money that never has any accountability anchored to it.

Apr 23, 2012 8:34am EDT  --  Report as abuse
jbeech wrote:
Let’s define the problem and posit a coure of action.

First, learning you overpaid and are upside-down in your home, as if it were a car, leaves folks in the financial doldrums, e.g. not spending on anything they don’t have to. Moreover, anybody struggling to meet their obligations, e.g. having trouble making the payment but nevertheless getting it done, when combined with the knowledge the home is a black hole they’ll likely never recover from are simply not going to spend like usual.

Second, absent normalized spending the economy will struggle as well.

Thus, either help these folks, or face the consequences of years, and years of tepid economic progress.

This defines the problem, and suggests a solution path.

Resolving these issues are above my paygrade, but if I were king for a day, I would propose refinancing everybody who is current at the 10-year rate.

Folks who choose to participate will, however, immediately own a variable rate mortgage going forward and thus, whereever the 10-year goes whither thoust goes their home’s rate.

While those in the pocket of Fannie and Freddie will protest, I believe this is too big a problem to let their cries about losing money bring down the nation. It’s my view just as the captain of the ship has to decide life and death for people, e.g. decide who gets a seat in the lifeboat, in our Republic the big cheese has to do the same. E.g. the President and the Congress need to see the bigger picture and save ‘we the people’ so they in turn spend again and save the nation.

It’s simple cause and effect.

Apr 23, 2012 9:30am EDT  --  Report as abuse
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