Bankers urge government to pull plug on Fannie, Freddie

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