Debate intensifies over what to do about Fannie Mae and Freddie Mac

The reason for this, said Wallison, is because the private securitization market is essentially dead. Fannie and Freddie must exist to buy mortgages from banks to keep the housing market functioning.

But lawmakers are going to have to come up with some kind of proposal fast. The recently passed Frank-Dodd financial reform bill requires a proposal for Fannie and Freddie by 2011.

“We know there is lots of political pressure to do something about Fannie Mae and Freddie Mac,” said Alex Pollock, resident fellow on financial policy at AEI, who will also be a panelist at Tuesday’s conference. “Everyone knows it’s a scandal to produce a 2,000 page financial reform bill without doing anything,” he added, referring to the fact that Congress left out any Fannie and Freddie reforms in the Frank-Dodd financial reform bill.

The two most possible alternatives for reforming Fannie and Freddie boil down to two extremes: either completely nationalize the mortgage lenders or privatize them. Experts say a solution that mixes private with public — like what existed before — is “unsustainable.”

“They will have to either keep them going as government entities or break them up and return them to GSE [Government-sponsored enterprise] status,” said Rivlin. “What we do know is the prior situation didn’t work. The problem is mixing private with public – it’s unsustainable.”

“Either formalize it as a national, government agency or privatize it,” Ted Gayer, co-director of Economic Studies at the Brookings Institution, told TheDC. “Where it plays out, I just don’t know. With housing continuing to be weak, that makes transition complicated.”

Pollock says that the future of Fannie and Freddie could depend on which party controls Congress after the upcoming midterm elections.

“One interesting element is definitely going to be the upcoming elections in November,” said Pollock. “That will clearly influence this debate.”

Gayer, however, said he was hesitant to rush into putting everything into the hands of partisan politics and that the outcome will be hard to predict regardless of the party in power. “There is a simple left-right story to tell, but people on all sides are mixing it up,” he said. “There is no easy answer or clear ideological position.”

If the current complexities of the debate are any indication, reforming and restructuring the mortgage behemoths is going to be the next big political battle in the area of financial reform. And everyone is going to want a say.

“This will be a great big stew pot on the stove [in]Washington, D.C.,” said Pollock. “And there will be hundreds of cooks — special interests, trade groups, realtors, Wall Street types, lobbyists, and of course politicians” who will want a say on what will become of Freddie Mac and Fannie Mae.