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August 17th, 2010

Fannie, Freddie Reform Talk of the Nation Today



The consensus is growing increasingly clear amongst market observers and administration officials alike: the government needs to distance itself from the nation’s housing market. But the billion-dollar question remains: “How?”

The sentiment for change was voiced this morning by Treasury Secretary Timothy Geithner who “promised ‘fundamental change’ for the nation’s housing finance system…” at the Conference on the Future of Housing Finance, wrote Housing and Urban Development (HUD),

A couple hundred federal officials, industry insiders and experts gathered in Washington to discuss the ever-changing landscape of our nation’s housing system. The current state of the U.S. housing industry is one fraught with uncertainty and one that’s mired in high-cost supports especially for the country’s two largest mortgage players: Fannie Mae and Freddie Mac.

Fannie and Freddie were the hot topic of conversation this morning, and deservedly so. As we approach the two-year anniversary of the federal takeover of the GSEs, their $148 billion tab in losses from the lingering effects of the housing crash continues to grow. The Obama Administration recently announced plans to reform Fannie and Freddie by January of 2011; a timetable we think is too ambitious and possibly risky.

Geithner told attendees that Fannie and Freddie will not continue in their current form for too much longer:

“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support,” Geithner told about 200 industry officials, affordable housing advocates and experts gathered at the Treasury Department. “We will not support a return to the system where private gains are subsidized by taxpayer losses.”

As Geithner and Donovan both agreed that the Washington should take on a less-involved role in national housing, they also agreed that embarking on this change won’t be easy or uneventful. Economist Douglas Elliott admitted the process is likely to be laden with risk:

“Nobody wants to mess up the mortgage market,” said Douglas Elliott, an economics fellow at the Brookings Institution think tank. “And any transition with Fannie and Freddie is going to be fraught with some risk.”

Risky or not, until the government removes itself from the market, private investors will remain apprehensive about once again investing in mortgages:

The problem facing policy makers: how to bring private capital back to its traditional role in taking credit risk on mortgages. Between Fannie, Freddie, and government agencies such as the Federal Housing Administration, the government backs nearly nine in 10 new loans today.

What’s the purpose of today’s conference? What is going to be accomplished?

As Nick Timiraos of the Wall Street Journal writes, “Tuesday’s sessions promised to be part college seminar and part political theater.” Today’s conference should be a window into the reform of Fannie and Freddie that the White House has promised to deliver this January:

[The "sessions"] could help offer the administration a shield against partisan recriminations of foot-dragging as the two-year anniversary of the government takeover of Fannie and Freddie approaches. The event could also help build broader support for the roadmap that the White House has promised to deliver by early next year.

Having the administration’s housing heads declare the need for change doesn’t do much for the market today. We’ll have to wait and see this January if the administration’s “roadmap” will lead us out of this mess or get us even more lost.

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2 Responses to “Fannie, Freddie Reform Talk of the Nation Today”

  1. Lucia Says: August 17th, 2010 at 4:47 pm

    I expect a complete nationalization of Freddie and Fannie plus name changes. That’s the way this administration has handled every problem so far, with expedience and efficiency as the reasoning behind their heavy handedness.

  2. Tim Manni Says: August 18th, 2010 at 8:23 am

    Hey Lucia,

    Good to hear from you. I’m expecting a phase out. They can’t completely vanish them and start a new, that would create chaos. Geithner and Donovan are on record saying they need their roles in housing to be reduced, so that’s why I’m not expecting full nationalization as you suggest. The government will always have a role in guaranteeing some mortgages, but F&F grew way too large, suffocating the private market. I don’t know if there will be name changes, but I think the repercussions of F&F’s dominance is now fully recognized as the private market is nowhere to be seen. They need to ramp up private-market activity…and that’s only going to happen slowly over time.

    Thanks for commenting,

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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