Financial experts and banking industry insiders gathered at the Treasury Department in Washington Tuesday to discuss the future of mortgage giants Fannie Mae and Freddie Mac. The general consensus? There is agreement that Fannie and Freddie cannot continue to exist in their current state of government conservatorship — but the agreement ends there.
The real question is to what extent should the government be involved in the housing market. Options range from letting the private market fix the housing mortgage system to turning Fannie and Freddie permanently into government-backed agencies, and everything in between.
“There is no consensus about that part,” Alex Pollock, financial policy scholar at American Enterprise Institute (AEI) told The Daily Caller. “Some were advocates of the private market taking over, but there were also a number of voices for an increased government role with a continuous flow of subsidies.”
Mark Zandi, chief economist at Moody’s Analytics, for instance, said during the panel discussions that the government “should continue to play a very large role in the housing market.”
“Government is part of our future,” said Bill Gross, bond manager at Pacific Investment Management Co. (PIMCO). “We need a government balance sheet. To suggest that the private market comeback in is simply impractical. It won’t work.”
Treasury Secretary Geithner, however, was one of those advocating for a more hands-off approach.
“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” said Geithner in his opening remarks.
He continued: “We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support…We will not support a return to the system where private gains are subsidized by taxpayer losses.”
Those “taxpayer losses” have turned into a total of $150 billion in taxpayer money that has gone toward keeping Fannie and Freddie afloat for the last two years.
When asked if he takes Geithner’s smaller-government talk seriously, Pollock responded by saying “absolutely.”
“I absolutely take Geithner seriously,” said Pollock. “He wants a smaller [government] role.”
But when it comes to the overall question – how much government involvement is necessary in the housing market – Pollock couldn’t say. Right now Fannie and Freddie back 95 percent of home mortgages in the U.S. “It needs to be less than that,” he said. “More like around 15 percent.”
Five Republican senators – Saxby Chambliss of Georgia, John Thune of South Dakota, Mike Crapo of Idaho, Tom Coburn of Oklahoma and Johnny Isakson of Georgia – also sent a letter today to Secretary Geithner, calling on him to stop supporting Fannie and Freddie with taxpayer dollars.
“These two catalysts of the mortgage meltdown over the last several years have now cost the taxpayers upwards of $148 billion,” said the letter. “This puzzling practice of repeating past mistakes which contributed to the housing bubble and the current state of our economy must end. Real ideas for reform exist and must be considered immediately. “
The letter also called on Geithner to provide a timeline for reform of the mortgage giants and to restrict funding Fannie and Freddie with tax dollars.
Pollock said he won’t make any prediction about what the ultimate outcome will be for Fannie and Freddie reform, nor what kind of timeline to expect. The Frank-Dodd financial reform bill does require a proposal by early 2011. But, as Pollock pointed out, there’s a big difference between a proposal and real change.
When it comes to reforming Fannie and Freddie, “I’m a long-term optimist,” said Pollock. “But I don’t know about the short term.”