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Think Tanked
Posted at 12:26 PM ET, 08/09/2011

Fannie and Freddie ask for $7 billion more; Could it lead to actual reform?

Freddie Mac, the mortgage finance house, said Monday that it will ask for an additional $1.5 billion of taxpayer money to make up for losses stemming from weak housing markets.

The request falls on the heels of an announcement last week by Freddie Mac’s sister organization, Fannie Mae, that it will need $5.1 billion to make up its shortfall. The two coincide with Standard & Poor’s downgrade of the U.S. government’s credit rating from AAA status to AA+, which has the potential to affect the institutions’ lending and collecting abilities.

But how the Treasury Department chooses to respond to the requests of Fannie Mae and Freddie Mac could be the catalyst for definitive reform of the institutions.

Both the Obama administration and Congress have insisted on reform of the two entities since 2008, but few steps to reform have been taken by either branch on this politically charged issue.

“No one should be surprised by the request for more funding,” said Heritage Foundation’s James Gattuso.

“It’s a reminder that while the other bailouts that began in 2008 have been or are being resolved, the taxpayer bailout of Fannie and Freddie are continuing,” said Gattuso.

The government seized both institutions nearly three years ago in the midst of the financial crisis, with Freddie Mac having drawn $65.2 billion from the government since September 2008.

Nonetheless, Gattuso concedes, the Treasury Department may have no choice but to provide the funds requested, which “only underscores the necessity of fixing the system so that taxpayers are not again put in such a position.”

But Gattuso is not arguing for reform so much as abolition.

“Such reform should include a gradual but definitive liquidation of Fannie Mae and Freddie Mac, and their replacement by private institutions that enjoy no federal guarantees,” he said.

Robert Kuttner, distinguished senior fellow at the New York-based progressive think tank Demos, argues that if Fannie and Freddie are going to receive public money, then they should be public entities.

“Fannie Mae and Freddie Mac should go back to Fannie’s pre-1969 role as a public corporation run entirely by the government,” said Kuttner. He added, “They should not be in the business of facilitating complex financial slicing and dicing. Prior to 1969, Fannie Mae worked like a Swiss watch.”

Kuttner also said that, as public institutions, Fannie and Freddie should be “force]s] for the drastic simplification of the mortgage industry.”

By  |  12:26 PM ET, 08/09/2011

 
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