Bipartisan support for scrapping Fannie, Freddie draws criticism

Dec. 29 (Bloomberg) -- Chuck Gabriel, an analyst at Capital Alpha Partners LLC, talks about the outlook for overhauling Fannie Mae and Freddie Mac, which were seized by the federal government in 2008. Gabriel speaks with Peter Cook on Bloomberg Television's "Fast Forward." (Source: Bloomberg)
Washington Post Staff Writer
Wednesday, February 9, 2011; 10:55 PM

To many Republicans and the Obama administration, Fannie Mae and Freddie Mac, the government's mortgage giants, are ill. But rather than healing them, both sides agree that the companies should be left to die and that their support for the housing market should wither away.

Some influential interest groups are taking issue with that surprising bipartisan consensus.

They include small banks, real estate agents and consumer groups, who all say that Fannie and Freddie, or something similar, are crucial for sustaining the struggling housing market.

And ahead of the administration's scheduled release Friday of a white paper on overhauling the nation's mortgage system, some economists are also saying that shrinking the government's role too much will make housing far more costly for Americans.

"These groups have considerable political clout and will make it difficult to get Congress to act on housing finance reform," said Jaret Seiberg, an analyst with MF Global. "Legislation to cut back the government's role in housing finance will result in higher mortgage rates and downward pressure on home values. That is a tough vote for many lawmakers, regardless of their party affiliation."

Some business groups, such as small banks and credit unions, are worried that the demise of Fannie and Freddie would allow large financial firms to dominate the mortgage market. Realtors and home builders are reluctant to part with the federal subsidy for housing provided by Fannie and Freddie. Consumer groups are wary of eliminating the firms because of the role they play in helping lower- and moderate-income homebuyers get access to mortgages.

Seiberg said that this opposition could lead the administration to retain the two companies and reform them.

"We continue to believe the administration will restructure its investments in the enterprises to stabilize them to give Congress even more time to act," he said in a research report Wednesday. "A more stable Fannie and Freddie reduces the need for legislation, which makes it even harder to get lawmakers to act."

Divergent approaches

Although Republicans and the administration agree that Fannie and Freddie have got to go, that's where the agreement ends.

Congressional Republicans want to accelerate the mortgage giants' demise, reflecting their view that Fannie and Freddie are government-created monstrosities whose victims have been taxpayers. The seizure of the companies has cost the Treasury more than $130 billion. The Obama team wants to take a gradual approach.

And on the question of what should replace them, the GOP has outlined a clear, if controversial, vision: nothing. The administration's long-delayed white paper, by contrast, will not present a single vision for reform, but three different options.

This approach to overhauling Fannie and Freddie could make it even less likely that Congress will devise a new system for housing finance this year.

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