Fixing Fannie Mae and Freddie Mac: The Debate Begins

Fannie Mae and Freddie Mac The Obama administration acknowledged Tuesday that major changes must be made to mortgage giants Fannie Mae and Freddie Mac, but indicated that it supports continuing government guarantees in the mortgage sector. Is that a good idea?

Speaking at the start of a White House conference designed to foster public comment on the fate of Fannie and Freddie, Housing and Urban Development Secretary Shaun Donovan said: "Given where we are today, our footprint needs to be smaller."

But Donovan also told CNBC that the government was playing an "important role in stabilizing the mortgage market during the current downturn." He added that Fannie's and Freddie's financial problems don't lend themselves to easy solutions.

"A Carefully Designed Guarantee in a Reformed System"

Fannie and Freddie, which were seized by the government in 2008 to avoid a collapse of the mortgage market, are already holding $148 billion worth of bad debts from loans guaranteed before they were placed under conservatorship -- debts that will now fall on U.S. taxpayers to repay. A total of $5 trillion of guaranteed mortgages are still outstanding, and the amount of bad loans is expected to grow substantially in the coming months as more people who bought homes during the housing boom default.

Treasury Secretary Timothy Geithner, the host of the conference, made it clear that the administration has not abandoned the Fannie-Freddie model of backing loans.

"I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns," Geithner said.

But he came out in favor of the government stepping back from being the primary mortgage lender in the U.S. "We need to begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages," Geithner told the conference.

Strictly Securitization?

But the issue of whether or not to continue providing mortgage guarantees has prompted serious debate about what role government should play in what used to be an entirely private sector business.

Lawrence J. White, an economics professor at New York University's Stern School of Business, says Fannie and Freddie should be turned into purely private companies that carry out securitization -- the bundling of mortgages into bonds that are then sold to institutional investors.

"If their brand name and their systems and their collections of personnel have value in the marketplace, then they will survive," White says. "If it does not, then the market will eat their lunch."

White says he can see no reason for continuing government guarantees of mortgage securities. He says the private securitization market is sophisticated enough to provide the necessary guarantees to investors. But he acknowledged that the private market is dead at the moment because of the financial collapse and may take several years to recover. Therefore, he says, government backing for Fannie and Freddie can't end immediately as some critics have demanded.

He added that there may be a continuing benefit to having the Federal Housing Authority help low-income borrowers become first-time home owners, but that would not require the continued existence of either Fannie or Freddie.

A Role for Low-Income Borrowers

Linda Couch, deputy director of the National Low Income Housing Coalition, says she favors a continuing role for the federal government in issuing mortgages, as long as that help is limited to the lowest-income households.

"It is our hope that this whole reform process results in a mechanism to help people at the lowest income levels afford homes or spurs the development of affordable rental housing," Couch says. "If that happens through government backing of securities, then that might be the way to go."

But Couch was clear in her view that the government should stop guaranteeing mortgages for wealthy people. Fannie and Freddie currently limit the size of "conforming" mortgages -- those that they will buy from lenders -- to $417,000.

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Reverse Mortgage Company was extremely helpful and accommodating from the very first contact. Both their personal and professional cares were outstanding and we feel they performed with our best interest as their uppermost concern.

July 28 2013 at 6:02 AM Report abuse rate up rate down Reply

so whats gonna change....nothin

August 18 2010 at 3:39 PM Report abuse +3 rate up rate down Reply

When your company begins to collapse, you hire new management----unless you are the federal government.

August 18 2010 at 2:56 PM Report abuse +3 rate up rate down Reply

NO more bailouts !!

August 18 2010 at 1:42 PM Report abuse +4 rate up rate down Reply

As far as Freddie amd Fannie goes are they not responsible fro the mortgage meltdown?

August 18 2010 at 1:28 PM Report abuse +3 rate up rate down Reply

Stop lending to risky buyers. Auction off defaulted loans. Charge the banks that made the bad loans the difference. Insure new loans with home-buyers money. Set new loan limits base on zip codes. Sell the new Fannie and Freddy to qualified private buyers. Get government completely out of market based businesses. Not a prayer with socialists in control!

August 18 2010 at 1:25 PM Report abuse +1 rate up rate down Reply
1 reply to wrightbobo's comment

You are so right.What was the goverment thinking??They should of known that the banks would take all the money and keep it for themselves.It is the same as giving money to the rich.The more they have the more they want.But yet pay little or no taxes at all.Use ther writeoffs to benifit them selves. The president always talks about the people making over 75.000 a year? what about the everyday working man who has never seen that amount of money ever.Guess we just do not count.Money & tax breakes go to the wealthy.

September 08 2010 at 12:51 PM Report abuse rate up rate down Reply

How many more expamples do the sheeple need before waking up to the reality that government is not the solution, it is the problem?

August 18 2010 at 11:57 AM Report abuse +4 rate up rate down Reply

The real estate bubble was driven by flippers speculating not by poor people who tried to buy more house than they could afford. It was not Fannie and Freddie who gave subprimes to people who actually qualified for fixed rates. Fannie and Freddie did exactly what the financial sector set them up to do and that was be the designated fall guy for the mess that the feeding frenzy that was the real estate bubble created. Realtors and mortagage brokers as well as banks promoted subprimes by telling sceptical buyers they could refi to a fixed rate on the value that inflation was creating because real estate never went down in price. Wall Street was clamoring for more subprimes because they were making a killing by bundling them into toxic debt time bomobs that were peddled as AAA rated securities. There are problems with Fannie and Freddie all right but it has nothing to do with attempts a social engineering. It had everything to do with the finanical sector making sure that there was a slower entity in the economic game of muscial chairs they were playing.

August 18 2010 at 11:11 AM Report abuse +1 rate up rate down Reply

to "progressives" EVERYTHING is a right-------------

August 18 2010 at 11:05 AM Report abuse +1 rate up rate down Reply

We have to get out of the mindset that everything is a right, this includes home ownership.The govt can ill afford to guarantee a mortgage to someone who cant afford it in the first place.

August 18 2010 at 10:44 AM Report abuse +2 rate up rate down Reply