2009: Which Structure is Best for Fannie & Freddie?by Tim Manni
As the new year approaches, policymakers have clashed over the most productive operating structure for Fannie Mae and Freddie Mac. The government-sponsored enterprises were ushered into a conservatorship in September, as the companies’ failures significantly contributed to the country’s home-loan crisis, and were in danger of failure. No matter which operating structure is chosen, the two mortgage giants must be restructured to prevent similar failure, while continuing their tremendous financial support of the marketplace.
Several restructuring approaches for Fannie and Freddie include doing away with the government-sponsored entities altogether, reverting back to their previous operating structure, or remaining government-sponsored agencies. By doing away with Fannie and Freddie, private lenders could dominate the mortgage market, making it nearly impossible for many borrowers to be approved for a loan during tough economic times (exactly what’s occurring right now). If Fannie and Freddie reverted back to their original operating status, it re-invents the struggles between profit-hungry shareholders and federal policymakers in charge of oversight. Critics of the GSE’s current status argue there is already too much government involvement in the mortgage market, and allowing Fannie and Freddie to remain under the government’s umbrella would only make it worse.
What is the President-elect’s opinion on the topic? Although Obama has said little on the subject, his chief economic adviser Lawrence Summers told the Washington Post last summer that the GSE’s functions should be divided:
…Summers wrote that the government should use Fannie and Freddie to support the housing market during the crisis and that the government should then “divide their functions into government and private components, the latter of which would be sold off in multiple pieces.”
One model gaining attention among some top policymakers would incorporate public and private elements, dividing Fannie and Freddie into separate components. One part of Fannie and Freddie’s business involves buying mortgage bonds and other assets, holding them in a portfolio and trading them — much like any other investment fund. This component would be privatized, with no government backing.
A much bigger part involves the guarantee business, where Fannie and Freddie pool mortgages and guarantee timely payment of principal and interest. This area would receive explicit government backing, possibly from the Treasury if it agrees to insure mortgages in exchange for a fee.
READERS: What should the government’s involvement be in the mortgage market? Does the government have too much influence — is there not enough?