Is There a Future for Fannie and Freddie?
As the housing market continues to struggle, with taxpayers carrying much of the burden for defaulting mortgages, many are asking: Is there a future for Fannie and Freddie? And eighteen months after their takeover by the government, Treasury has yet to propose an answer.
When the housing market crashed, it took down the GSEs, Fannie Mae and Freddie Mac, the mortgage giants that, at the time backed about a quarter of U.S. mortgages. Now, however, after less than five years, and because of the contraction of the private mortgage market, their portfolio has grown by almost 150 percent encompassing about two-thirds of all mortgages. And since the government virtually owns Fannie and Freddie, the U.S. taxpayer is on the hook for losses.
Just last year the regulatory limit on losses of both Fannie and Freddie was increased to $200 billion each. Later, the government agreed to provide unlimited financial support, a commitment that some have projected, could put taxpayers at risk for losses of almost $1 trillion.
A conference to be held on Tuesday of this week will discuss the options and future direction of the GSEs in an attempt to stabilize both housing and the two mortgage giants. Most agree, however, that a transition must be gradual in order to avoid further shocks to housing; but there seems to be little agreement upon a strategy or the extent of the changes.
One option would create a co-op between several of the largest lenders with each owning a portion of the new entity; and the government would be required to furnish insurance on the mortgages. Such an arrangement appeals to some, as it would remove much of the risk to taxpayers and would encourage the participating lenders to monitor the quality of mortgages being supplied by the others.
Others have suggested that Fannie and Freddie be broken into several smaller, competing operations. A few have even recommended a permanent nationalization of the GSEs. Then, of course, the big banks have their own ideas.
Is there a future for Fannie and Freddie? While the outcome of the conference and ultimate legislation may be uncertain, we can be sure of one thing; the banking and housing lobbies will have a powerful influence. And lawmakers, forever a slave to lobbyists’ wishes, will see that the special interests, not consumers, are protected. That’s the way politicians seem to work, and their record in protecting Main Street during this crisis has been nothing short of abysmal.
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