As suspected: Fannie, Freddie reform not coming this monthby Tim Manni
It was about six months ago when we predicted that the Treasury’s proposal to reform Fannie Mae and Freddie Mac would not be ready by January 2011:
We really don’t see a coherent, well-thought-out proposal being delivered to lawmakers in less than six months. Here are a few reasons why:
1. There will be a new Congress. Congressional elections occur in November and the new Congressmen will just be getting to work by the start of the year.
2. Six months is not enough time. “The complexities of the GSEs, their role in the market dysfunction and how to create new entities will require exhaustive review and study to produce solid proposals for discussion,” said HSH VP Keith Gumbinger. “Six months isn’t nearly enough time.”
3. Getting it wrong. This reason is short and simple: getting the reform of Fannie and Freddie wrong could be devastating to the market’s recovery.
4. They may not want to alter it. It’s certainly not out of the realm of possibility that come January, the White House will delay the debate of Fannie and Freddie for another year so it becomes another administration’s problem to worry about. Furthermore, by 2012, the market may have recovered to a point where Fannie and Freddie can re-emerge into the market without having to undergo too many changes.
Earlier this week, our prediction was confirmed when the Treasury announced their proposal would be kicked down the road:
Under Dodd-Frank, signed by President Barack Obama in July, the administration was to deliver a proposal for ending the losses and restructuring the nation’s mortgage finance system before the end of January.
Treasury Secretary Timothy F. Geithner instead will deliver the report in mid-February so the timing won’t interfere with the president’s State of the Union speech tomorrow and Obama’s budget proposal the week of Feb. 13, according to an administration official who spoke on condition of anonymity because the timing hasn’t been made public.
Today I came across another credible source who agrees with our assessment that serious reform isn’t likely to come this year at all, but rather it will be saved for a different administration to deal with:
Moody’s believes that major reforms are unlikely to be adopted until after the 2012 presidential election and that it is likely changes will be phased in over time. “While a political solution may not be quick in coming, the credit market will at some point expect clarity on the role of Fannie Mae and Freddie Mac by demanding a greater risk premium on their obligations, thus increasing their borrowing costs and raising the cost of mortgage credit.”
Even if Geithner and company have their proposal by February, I’m not anticipating that it will be fully fleshed out with lots of details and specifics. I guess we’ll have to wait and see.