What's Next For Fannie, Freddie? Hard To Say
The Obama administration will unveil Friday its plan for the future of the mortgage giants Fannie Mae and Freddie Mac, but don't expect a singular vision for how to move ahead. Instead, the administration is expected to present a menu of options on what the government's role in housing finance should be.
The government took Fannie and Freddie into conservatorship at the height of the financial crisis. Two years later, the bill to taxpayers is more than $130 billion and counting. Fannie and Freddie now play a larger role in the nation's housing finance system than ever.
"The government now is financing upwards of 90 percent of all the mortgages being made in this country," says Guy Cecala, publisher of Inside Mortgage Finance.
The bulk of that is being done by Fannie and Freddie.
Here's how it works: Banks issue the loans, then they sell them to Fannie and Freddie. The firms bundle those loans up into securities, stamp them with an implied government guarantee and then sell them off to investors. They used to have competition, but these days, Cecala says, the private sector is on the sidelines.
"It's clearly much too large a government footprint in the mortgage market," he says.
That is one thing almost everyone agrees on.
Michael Barr, a law professor at the University of Michigan who recently left the Treasury Department, says that for the near term the Obama administration's plan will include a series of steps "to begin to wind down Fannie Mae and Freddie Mac, and begin to draw in private sector capital and begin to set the stage for housing finance reform."
The idea would be to gradually limit Fannie and Freddie's size by reducing the number of loans they handle. That could be done by increasing the fees they charge and by lowering the conforming loan limit. In some high-cost areas, Fannie and Freddie can bankroll loans for up to $729,000. That limit will drop back to $625,000 this fall unless Congress intervenes.
"That's a way of saying, well for the largest mortgages, for jumbo mortgages, let's let the private sector take on that risk, let's see how they perform, let's try and draw that private capital back in," Barr says.
It's much harder to get something done in Washington than it is to prevent something from getting done. And you know our view is the most likely outcome is some version of the status quo. Fannie and Freddie may yet live to see another day, another year.
Although these ideas would start to limit the government's footprint in the mortgage market, they aren't the kind of sweeping reforms that many are calling for. For that, Barr says, the administration will lay out a menu of options, but it won't stake out a hard-line position.
"I don't think that the administration wants to poke the House Republicans in the eye with a plan that they'd fundamentally disagree with," he says.
Instead, the administration appears poised to say: The ball is in your court, guys.
"Let's start a conversation with a set of options. Let's see what the Republicans come up with in the house, what the Democrats come up with in the senate," Barr says. "And then hopefully come to a better agreement on longer term reform goals."
At a House committee hearing on Wednesday, it was clear neither party had cemented its position on a path forward for Fannie and Freddie.
"It's much harder to get something done in Washington than it is to prevent something from getting done," says Jaret Seiberg, an analyst with MF Global who follows financial policy. "And you know our view is the most likely outcome is some version of the status quo. Fannie and Freddie may yet live to see another day, another year."
Seiberg says that limiting the government's role in housing finance will make mortgages more expensive for would-be homeowners. That could hurt the already-weak housing market.
Cecala of Inside Mortgage Finance says this will weigh heavily on policymakers.
"As long as the housing market is terribly weak, people are going to be reluctant to do major wholesale changes to the mortgage market or they'll say we'll do them in two or three years when they hope the housing market gets better," he says.
Or, he says, maybe five or seven years. What to do about Fannie and Freddie remains the last big unresolved issue from the housing bubble and financial crisis that followed and it may stay that way for a while.
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