Fannie Mae, Freddie Mac losing political support as U.S. reshapes housing finance system
Saturday, August 7, 2010
For several decades, whenever a question of housing policy came up in Washington, two companies dominated. Fannie Mae and Freddie Mac marshaled armies of lobbyists, deep political connections and millions of dollars in contributions to get their way.
But now Fannie Mae and Freddie Mac, titans of the mortgage finance industry, are wards of the state, bailed out by Washington to the tune of $160 billion and banned from political activity. As the Obama administration and Congress prepare to take up overhauling the $12 trillion U.S. mortgage market, new interests are shaping the debate like never before.
Among those influencing many Democrats are affordable housing advocates and liberal think tanks that want the government to do less to foster homeownership and more to support rental housing for low-income people. Those influencing Republicans favor sharply reducing all federal support for housing.
In the past, Fannie and Freddie found backers on both sides of the political aisle. Key Democrats in Congress and in the Clinton administration were their most ardent supporters. President George W. Bush touted an "ownership society," relying on Fannie and Freddie to help low-income people buy homes.
Officials from both parties now agree that the housing finance system is unsustainable; virtually all new home loans are guaranteed by Fannie, Freddie or the Federal Housing Administration, putting taxpayers on the line. Administration officials say they still believe in a significant government role in promoting home ownership, but one less expansive than under previous presidents. Republicans, who have introduced legislation to get rid of Fannie and Freddie altogether, might not vote for an overhaul that retains any government role in housing.
On Aug. 17, the Treasury Department is hosting a conference of financial companies, housing advocates, academics and other interested parties to begin discussing how to design a new system that doesn't rely as much on taxpayers. The Obama administration is required to make a proposal by January under the bill recently passed by Congress to reshape financial regulation.
"What I'm afraid of is that people on either side of the aisle will potentially play politics and point fingers," said Michael D. Berman, incoming chairman of the Mortgage Bankers Association. "There's some folks that are so afraid of having any government involvement at all because of the losses we've had."
But if politics does get in the way of housing reform, it would be despite a consensus emerging among housing companies and consumer advocates over what to do with Fannie and Freddie. That common ground is evident in letters filed last month with Treasury in response to a request for public comment about the future of U.S. housing policy.
Many of the groups that responded want to maintain Fannie and Freddie -- or set up several similar entities -- as heavily regulated companies that offer a guarantee to investors in high-quality mortgage loans. The federal government would stand behind that guarantee.
Under this scenario, the companies would charge mortgage originators a fee for the guarantee and use some of the money to cover mortgage investments that go bad. Part of the fee would be contributed to a separate insurance fund that would be tapped if one of the companies fails and can no longer stand behind the mortgage investments it guaranteed. Investors, the thinking goes, could remain confident in the mortgage securities and continue to buy them.
"I don't think we could possibly contemplate what it would be like to start without Fannie and Freddie in the picture," said Tom Deutsch, executive director of the American Securitization Forum, which represents many firms on Wall Street. "They can't disappear overnight."
The consensus approach would to try to fix several flaws in the original design of Fannie and Freddie that contributed to their collapse -- notably, their implicit government guarantee.