Bipartisan support for scrapping Fannie, Freddie draws criticism

By Zachary A. Goldfarb
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.

Federally backed Fannie and Freddie buy mortgage loans and guarantee them against default. This government guarantee has lent certainty and stability to the housing market, keeping funding available and interest rates low, at a time of severe stress. Fannie and Freddie, combined with the Federal Housing Administration, which supports low down-payment loans, have been behind more than 90 percent of new home loans in recent years.

Mark Zandi, an economist and adviser to both Republicans and Democrats, estimated this week that mortgage rates would be one percentage point higher and that home prices would be 10 percent lower if Fannie and Freddie were eliminated and nothing replaced them.

One of the options in the administration's white paper matches the Republican proposal that nothing replace the companies. The other two options involve a new government agency that would provide mortgage insurance for high-quality loans all the time - and one that would step in during times of crisis.

The administration will propose baby steps toward reducing government support, such as raising fees that Fannie and Freddie charge lenders and borrowers for the government guarantee as well reducing the size of mortgages they can insure, from $729,750 to $625,500.

The administration is also likely to champion steps that it has taken and regulators can take to overhaul the housing finance system.

GOP prodding

Meanwhile, Republicans, particularly in the House, say they will be pushing the administration to do more, faster.

"It's unfortunate that my colleagues across the aisle resisted any attempt last Congress to address the most expensive component of the federal government's intervention during the financial crisis," Rep. Scott Garrett (R-N.J.), chairman of the House panel overseeing housing finance, said Wednesday at hearing on their future.

But Rep. Barney Frank (D-Mass.), the top Democrat on the House Financial Services Committee, said that Republicans are likely to be more circumspect now that they are in charge and that any precipitous move to disrupt the housing market could cost homeowners in their districts.

The Republicans "seemed to know exactly what they wanted to do when they were in the minority," he said. "I think what they're finding is it's a little more complicated than they thought."

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