Fannie & Freddie: Time To Move On?


Once a big supporter of Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), Treasury Secretary Tim Geithner and powerful Congressman Barney Frank have turned sour on the two quasi-government mortgage giants.

“We will not support a return to the system where private gains are subsidized by taxpayer losses," Geithner said last week at a White House conference on mortgage.

One thing’s for sure: politicians don’t waste time toying with government-sponsored agencies that bleed taxpayers’ money faster than Uncle Sam can keep up.

According to government estimates, Fannie and Freddie (80% of which is now owned by U.S. taxpayers) blew through $145 billion in taxpayer-funded bailout money. That’s more than the combined amount that was spent to bail out American International Group (Stock Quote: AIG), General Motors (Stock Quote: GM) and Citigroup (Stock Quote: C).

What’s more, economists peg the cost of “fixing” Fannie and Freddie at $3.3 trillion, based on economic assumptions made by both government-sponsored enterprises earlier this month.

But if Fannie Mae and Freddie Mac were to exit the stage, something just as big would have to take their place. According to the Federal Reserve, Fannie and Freddie account for 53% of all U.S. residential mortgages, which has a total estimated value of $10.7 trillion.

So what ideas are cooking on Washington and Wall Street’s back burners in lieu of Fannie & Freddie? Here’s a look:

Disbanding Freddie & Fannie, replacing them with one “super-sized” direct mortgage provider

This is similar to how the government handled student loans, taking over the reins as the largest direct lender in the student loan arena, knocking Sallie Mae and many private lenders off the table in the process. By eliminating the “middlemen (Fannie & Freddie), some government estimates say the government can save $47 billion over the next decade.

Turning Freddie & Fannie Into Non-Profits

This idea comes from the National Association of Realtors (NAR). In a nutshell, NAR wants Congress to turn Fannie & Freddie into self-sustaining non-profits (primarily in the secondary mortgage market) that operate outside the jurisdiction of the federal government.

“We want to ensure a flow of capital into the mortgage market regardless of the state of the market or economy," Vince Malta, NAR vice president and liaison to government affairs, said to the House Financial Services Committee March 23. "The new Fannie and Freddie must ensure there is always mortgage capital available for creditworthy buyers and that taxpayer dollars are protected."

A private, non-profit model would make Fannie & Freddie offer mortgage products more aligned with business goals rather than the nation's housing policy for consumers.

"In difficult markets, like today's, private lenders have not been willing to make loans," said Malta. This is the model reportedly favored by Congressman Frank.

Turn the GSE’s into private, for-profit companies

This one comes the U.S. Government Accountability Office (GAO). The office sees a big role for Fannie & Freddie as a private source of standard mortgage loans, operating under strict government restrictions. The GAO would eliminate or significantly reduce Fannie & Freddie’s mortgage portfolios, set executive pay limits, turning Fannie and Freddie into lender-owned firms, instead of shareholder-owned firms.

There’s no sure bet what will happen to both Freddie Mac and Fannie Mae. But with forces in Washington calling for change, change is exactly what the mortgage market can expect – probably sooner than later.

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