Big questions on Fannie-Freddie unanswered

By Kevin Drawbaugh - Analysis

WASHINGTON (Reuters) - The U.S. government's stunning takeover of Fannie Mae and Freddie Mac saves the mortgage giants' lives, but fails to determine what they will look like once they unplug from life support.

The job of rehabilitating the nation's largest housing finance companies will fall to the next Congress and the next president, whether it's Democrat Barack Obama or Republican John McCain, analysts and academics said on Monday.

Hours after Fannie Mae and Freddie Mac were placed under federal conservatorship by Treasury Secretary Henry Paulson on Sunday, housing experts were predicting a struggle next year over the final fate of the government-sponsored enterprises, or GSEs.

"There doesn't seem to be an end-game in this ... It punts the ultimate question of what to do with the GSEs to the next administration and the next Congress," said Adam Levitin, associate professor at Georgetown University Law School.

U.S. Senate Banking Committee Chairman Christopher Dodd on Monday said he wants to bring Paulson before the committee this week to explain the takeover. Dodd predicted further trouble for the economy if the takeover kills Fannie and Freddie.

Acknowledging that some critics for years have wanted to shut down Fannie and Freddie, Dodd said, "If this is an ideological thrust to make it impossible for these institutions to exist, then further economic deterioration is predictable."

At least one thing is certain, as Dodd said: "A President Obama or a President McCain is going to have a mess dumped in their lap in the next 60 days."

RANGE OF REFORMS

Reform scenarios for Fannie and Freddie have been debated for years, ranging from nationalization at one extreme, to privatization at the other, with intermediate solutions in between like the middle ground the GSEs occupied until Sunday.

Taking into account next year's political changes on Capitol Hill and in the White House, chances for radical change in the next year or two may be remote, some analysts said.

The Democratic Party, a long-time ally of the GSEs, is widely expected to keep House of Representatives control next year, while possibly increasing its narrow Senate advantage.

"A McCain administration could try to push a radical change to the (GSEs), but that would need to get through the Democrats in Congress. We have trouble seeing that happen," said Jaret Seiberg, policy analyst at investment firm Stanford Group Co.

"If Obama wins, we expect he will push the regulator to conduct better oversight. But we do not expect him to propose major changes. This means the odds seem to favour the enterprises returning to the public markets," he said.

Paulson's plan calls for Fannie and Freddie to increase their mortgage portfolios to support a recovery in the U.S. housing market through 2009, then gradually reduce their activities by about 10 percent annually in the next decade.

But the secretary also urged policymakers to view the period when the companies are under conservatorship as a "time out." He said, "The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market."