Congress Won't Pull Plug on Fannie & Freddie Yet

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NEW YORK (MainStreet) – With increased calls for the government to shut down or at least phase out the big government-sponsored enterprises (GSEs) Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), some major housing industry groups are warning that any rash decisions could sink the fragile U.S. real estate market.

“Rash” decision or not, the real call will come from Congress, and already many on Capitol Hill are calling for the two mortgage giants to be wound down so that taxpayers won’t be left with too big of a bill at the end of the day.

“This system that privatized profits and socialized losses must come to an end,” says House Republican Conference Chairman Jeb Hensarling (R-Texas), who recently called for Fannie and Freddie to be phased out within five years. “I believe when the history is written Fannie and Freddie will prove to be the mother of all taxpayer bailouts.”

Taxpayers are already on the hook for $134 billion that the federal government has poured into the two mortgage entities. Hensarling, for one, has had enough. He’s reintroducing a bill in Congress (one that was voted down twice when Democrats held a majority in the House of Representatives) that would kill off both GSEs once and for all.

"We have waited for years to do something. It is time to start doing something,” he told Reuters in a recent interview

Overall, the House has approved eight bills to reform Fannie Mae and Freddie Mac just this past week: The House Capital Markets and Government Sponsored Enterprises Subcommittee issued the green light for legislation that would curb cushy executive compensation packages at both Fannie and Freddie, cut back on affordable housing initiatives, and stop both GSEs from launching any new mortgage-related activities.

With this flurry of activity in Congress, some major housing industry groups are urging legislators to move cautiously with Fannie and Freddie, citing a fragile real estate market and a precarious economy, both of which may be further imperiled by any overreaching on GSE reform.

In testimony in front of Congress on March 31, Ron Phipps, president of the National Association of Realtors (NAR), said that caution is the watchword when it comes to Fannie and Freddie.

“The NAR strongly agrees that the existing system failed and that reforms are needed; however, redesigning a viable secondary mortgage model that will protect taxpayer dollars and serve the country’s homeowners today, and in the future, can only be achieved through a methodical, measured effort,” said Phipps.

Phipps told Congress that an “adequate replacement” must be found to take the place of Fannie Mae and Freddie Mac before any big reforms are set in stone. And right now, there is no such replacement, and no desire by realtors to move forward with only a private-sector national mortgage model.

“We agree that increasing private capital in the mortgage finance market is necessary for a healthy market and for reducing the government’s involvement; however, proposed legislation that relies only on private capital to operate the secondary mortgage market will slow, if not stop the housing and economic recovery,” he said.

It looks like Congress will abide by the NRA’s wishes. With the economy teetering on the brink, and the housing market still very much in the sick bay, nobody wants to pull the plug on Fannie or Freddie right now, though plans are already on the table to take both GSEs out of the equation in the next few years.

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