Three possible Freddie and Fannie reform scenarios

Amanda Carey Contributor
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On February 9, House Republicans will begin their effort to reform government sponsored enterprises Fannie Mae and Freddie Mac, the giant mortgage lenders many blame for the 2008 financial collapse. The firms were both left out of the Dodd-Frank financial reform bill that was passed last summer to remedy the causes of the most recent recession.

But while Republicans on the Hill are anxious to finally tackle Fannie Mae and Freddie Mac, confusion abounds as to what direction they will take. And after factoring in the politics of the upcoming 2012 elections, any bipartisan reform will be slow in coming as Republicans and Democrats disagree on possible courses of action.

But because talk of Fannie and Freddie reform won’t be going away anytime soon, The Daily Caller thought you should know the three possible reform scenarios that are currently being debated.

1. Getting the “government” out of Government Sponsored Enterprise. The first scenario, favored by senior Republicans on the Financial Services Committee, like Rep. Jeb Hensarling of Texas, and most fiscal conservatives, is to scrap Fannie and Freddie altogether. It is by far the most drastic and radical approach, but when it comes to Fannie and Freddie, that just might be ok. As Anthony Randazzo, director of Economic Research at the Reason Foundation, pointed out, getting the government out of the business of securitizing mortgages does not mean low-income families would get stripped of their housing subsidies. On the contrary, affordable housing programs under the Federal Housing Authority would live on.

This idea gained some traction last spring when Hensarling introduced legislation directing the head of the Federal Housing Finance Agency (FHFA) the set a deadline for terminating the conservatorship of the two firms, effectively ending Fannie and Freddie as we know them. The bill never passed, but the idea still lingers. However, according to Mark Calabria, director of financial regulation studies at the Cato Institute, this scenario is politically unlikely. “That’s what they should do,” Calabria told The Daily Caller. “But odds are good that they will set up some sort of government insurance that would just cover mortgage-backed securities.”

2. Using the government as a last resort. The second option, which is more politically feasible, is to set up a Fannie and Freddie as mostly private, but allow for a mechanism where the government can intervene as a last resort. In this option, the government would only price guarantee, but would not allow Fannie or Freddie to buy or hold mortgages. So if, for example, an individual cannot pay back a loan, and all capital requirements have been exhausted, then the government could fully-back the guarantee. This proposal would likely unite all Republicans, including those who come from real-estate backgrounds like Rep. Gary Miller of California. It allows for the housing industry to exist within the free market, with the reassurance that the federal government could legally back guarantees if a repeat of 2008 occurs.

A variance of this option was put forth by a group of New York University professors. They propose a unique government guarantee that would be priced off indicators in the private market.

3. Following a good old-fashioned public utility model. In this scenario, which would be favored more by Democrats, Fannie and Freddie would act as a federal agency that facilitates the mortgage market. According to Randazzo, this would be based off the premise that there just isn’t enough existing capital to provide homes for everyone without some government assistance. This, however, has the danger of appearing to be too close to the status quo – something even Democrats do not want. “Democrats recognize Fannie and Freddie is just an albatross for them,” Calabria told TheDC, adding that they might not hold out for an option like this. Even President Obama, said Calabria, would “probably sign something he wouldn’t necessarily like because the politics of Fannie and Freddie are just difficult.”

A plan along these lines was put forth in a study released this month by Center for American Progress. In it, the authors call for entities that utilize the private market as much as possible, but rely on explicit government guarantees with the goal of supporting the “American dream of homeownership, provides a sufficient stock of affordable rental housing, and restores integrity and accountability to the system.”

Even with the current political climate, what is known is that GSE reform will happen even if only in small, piecemeal chunks of legislation. “I don’t think anyone thinks the status quo is a viable option,” said Randazzo.

Even Democratic Rep. Barney Frank of Massachusetts, the ranking member on the Financial Services Committee, is ready for Fannie and Freddie reform.

“Last year the Republicans were very insistent that this was an emergency,” Frank said recently. “I’m waiting for their plan. I am surprised that they’re not moving as quickly…They knew exactly what they wanted to do when they were in the minority, so I don’t know why they aren’t moving forward.”

Alex Pollock of the American Enterprise Institute told TheDC the only thing to do now is wait and see how Congress acts. “The important thing to do at this point is to get the ideas out which will guide the best possible reforms for an extremely large and important sector,” said Pollock, who has experience testifying on the Hill on the future of housing finance. “And we’ll see what happens.”