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

Amanda Carey Contributor
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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.”
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.