Paulson Floats Idea Of Mortgage 'Utilities'
Thursday, January 8, 2009
In his final speech scheduled as Treasury secretary, Henry M. Paulson Jr. yesterday proposed replacing mortgage-finance companies Fannie Mae and Freddie Mac with highly regulated utilities that would play a more limited role in making money available for home loans.
Paulson, speaking at the Economic Club of Washington, explored ways to reshape the nation's housing finance system. With his tenure expiring, his opinions will carry little formal authority, but few officials have had as intimate a look at the two companies as Paulson.
Top lawmakers are planning to revisit Fannie and Freddie as part of a broad regulatory revamp planned for this year. But officials in the incoming Obama administration have not spoken much about housing-finance policy -- and discussions over the future of Fannie and Freddie remain preliminary -- with key Congressional Democrats yet to solidify their positions.
Some longtime supporters of Fannie and Freddie, such as House Financial Services Committee Chairman Barney Frank (D-Mass.), have acknowledged the firms must be reassessed. Federal Reserve Chairman Ben S. Bernanke, who is slated to stay on until at least January 2010, has expressed support for an enduring but more limited role for the federally chartered housing companies.
Paulson completes a 2 1/2 -year term as the nation's chief economic policymaker when the Bush administration wraps up Jan. 20. Paulson's legacy largely will be shaped by his response to the financial crisis over the past year, including his orchestration of the government takeover of Fannie and Freddie in early September.
In the short term, Paulson said the government must continue to use Fannie and Freddie, based in the District and McLean, respectively, to bring down mortgage rates. Among other options, he said the government might buy a massive number of home loans through Fannie and Freddie in an effort to bring down the rate for a 30-year fixed mortgage to 4 percent.
"We have gone about as far as we can to avert systemic risk and to use [Fannie and Freddie] to speed progress through the housing correction that lies at the heart of our economic downturn," Paulson said.
Today, Fannie and Freddie own or stand behind $5.4 billion in home loans, about half the nation's mortgage market.
Over the long term, Paulson called for a reworking of Fannie and Freddie. He proposed replacing them with housing utilities -- private entities funded by investors that would purchase and bundle mortgages that, in exchange for a fee, would carry U.S. backing should they default. The bundles, known as mortgage-backed securities, would be sold to investors around the world.
Fannie and Freddie now perform that function, guaranteeing mortgages against default. But until the companies were seized by federal officials, the guarantees carried no formal backing from the U.S. government.
Paulson said, however, that the new housing utilities would not hold investment portfolios. That's a sharp change from the present. Fannie and Freddie own about $1.5 trillion in mortgages and mortgage-backed securities today, holding them and trading them just as a mutual fund would do with stocks.
Like other utilities, Paulson said these new entities would be highly regulated and that a commission would be created to limit returns, curbing the profit-seeking behavior of private companies. The commission would ensure that only creditworthy mortgages are guaranteed.