Fannie Mae/Freddie Mac–Where Do We Go From Here?

August 18, 2010
By Barbra Murray, Contributing Editor

Plenty of ideas on the future of mortgage lenders Fannie Mae and Freddie Mac emerged during a conference on housing finance hosted by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development on Tuesday, August 17. The government-sponsored enterprises cannot continue to operate as they have, but just what role the government will play in guaranteeing mortgage securities is the issue at hand.

Fannie Mae and Freddie Mac’s seemingly endless call for financial assistance tells a grim story. After securing $8.4 billion from the Treasury during the first quarter of this year, Fannie Mae, having experienced a second quarter net loss of $3.1 billion, returned to request an additional $1.5 billion earlier this month. The money is piling up higher and higher. Upon receipt of the recently requested $1.5 billion, Fannie Mae will have received a Treasury bailout of an aggregate $86.1 billion.

Many industry experts agree that it is imperative that the federal government be involved in housing finance in some capacity. “The fear is that if the government ceases to support Fannie Mae and Freddie Mac and took itself out of the mortgage securitization game, serious harm could be done to the U.S. housing market,” Dr. Stuart A Gabriel, Professor of Finance and Director of the Richard S. Ziman Center for Real Estate at UCLA, told CPE. “All private housing mortgage securitizations have failed and gone away in the crisis, leaving the government as the sole securitizer of mortgages. But the old housing finance system as we knew it is a dead system, a failed system, and I think there is wide consensus that we’re not going back to that. It’s time to move forward with structural reform and the U.S. housing finance system will require some form of U.S. guarantee on mortgages.”

The Treasury is on the same page. “It is important to note that reform, as [Rep.] Barney Frank has said, is about more than designing an elegant funeral for Fannie and Freddie,” Secretary of Treasury Tim Geithner said to the group of lawmakers yesterday. “It requires a broader reassessment of how much support the government should provide for housing finance.”

The solutions will not come overnight.

“The question is how to reincarnate and restructure the government support for the mortgage market, and how deep and broad that support might be and how much it should cost taxpayers,” Gabriel said. “These are deep and significant economic questions that don’t lend themselves to a quick and dirty analysis.”

The issue of accessibility is a significant policy issue, he added. “The Bush and Clinton administrations supported government mortgage purchases that would provide broad homeownership opportunities to the underserved. The question is, has that succeeded or failed? The question for the Obama Administration is whether to continue with the policy of the Bush and Clinton administrations, and how deep and broad government support for the U.S. mortgage market should be.”

A comprehensive proposal for housing finance reform will be presented to Congress by January 2011.