Nearly two years ago, the federal government began pumping what now totals almost $150 billion of taxpayer money into mortgage giants Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) in order to keep them afloat. Seen at the time as too big to fail, the two massive mortgage entities, which collectively back more than $5 trillion worth of home mortgages in the U.S., were essentially taken over by the federal government in September 2008 when they were placed under conservatorship.
Despite the federal intervention, Freddie and Fannie just announced a combined loss of $9 billion for the April – June period of this year. Now, they are asking for more than $3 billion more in bailout money.
This time, however, lawmakers are saying enough is enough and suggesting that it is time to rebuild the mortgage market. That means restructuring Fannie and Freddie.
On Tuesday, the Obama administration will be hosting a conference with industry officials to discuss the future of the two lenders. The biggest question on the table: how involved should the government continue to be in subsidizing the housing market?
The solution is far from clear.
Since Fannie and Freddie’s second quarter losses are a painful reminder that the entities are anything but financially stable, completely cutting them loose from government support could cause them both to become insolvent again. The result would likely be another housing-market catastrophe. However, the kind of complete takeover by the government that would be needed to render Fannie and Freddie sound would mean adding all their bad mortgages to the U.S. debt – which already stands at $12.5 trillion.
So while Fannie and Freddie would permanently become government-backed like any other bureaucratic agency (as opposed to its current temporary status), the country’s financial situation would decline dramatically. For many, that is a lose-lose situation.
Panelists at Tuesday’s conference will include industry insiders like Mike Heid, co-president of Wells Fargo Home Mortgage; Marc H. Morial, president and CEO of the National Urban League; and Mark Zandi, chief economist of Moody’s Analytics.
And while there is bound to be a variety of differing opinions on what to do with Fannie and Freddie, a survey of several Washington financial experts suggests that everyone will agree on at least three things: reform is needed, the previous system is unsustainable, and the imminent political battle that is emerging over the issue will certainly be a drawn-out debate.
Alice Rivlin, senior fellow for Economic Studies at the Brookings Institution told The Daily Caller that the American people should not expect a resolution to the problem in the near future.
“It is absolutely right there is going to be a political battle, but it won’t be settled anytime soon,” said Rivlin. “Fannie and Freddie support a lot of housing mortgages.”
Peter Wallison, financial policy studies fellow at the American Enterprise Institute (AEI) concurred with Rivlin’s assessment in an interview with TheDC.
“There will be a big political battle, but it will be prolonged,” said Wallison. “Right now there is no alternative to them [Fannie and Freddie]. They will have to remain as they are indefinitely.”