If the next Congress wants to accomplish something, it might take up the matter of Fannie Mae (FNMA) and Freddie Mac (FMCC), the federal housing agencies that effectively went bankrupt in 2008 and were rescued through a $187 billion taxpayer bailout.
Fannie and Freddie are profitable now, and they’ve paid back all the taxpayer funds that kept them afloat during the worst housing bust since the 1930s. Yet they’re still owned and operated by the U.S. government, a status that was supposed to be temporary when a government conservator took control of the two companies in 2008. “It’s been six years now that the conservator has been overseeing and directing the actions of Fannie Mae and Freddie Mac,” Ed DeMarco, who ran that conservatorship from 2009 to early 2014, tells me in the video above. “This is not a healthy condition.”
The problem is there’s no consensus about what to do with Fannie and Freddie. The government bailout allowed them to continue operating during the 2008 financial meltdown and the deep recession that followed. Without them, the housing market would have essentially shut down and a recession probably would have become a depression.
Fannie and Freddie don’t issue loans, but they play a crucial role by guaranteeing mortgages that are packaged into securities sold to investors, which are supposed to be very safe investments. An epidemic of risky mortgages that Wall Street peddled as safe in the early 2000s set the stage for hundreds of thousands of unforeseen defaults and the downfall of Fannie and Freddie.
The severity of that meltdown is reflected in the delicacy with which policymakers treat Fannie and Freddie today. The two agencies are responsible for nearly all the new mortgages securitized in the U.S. market, since private-sector operators have essentially gotten out of the business. Most experts say there needs to a significant private-sector presence in the market for housing finance, to preserve free-market dynamics and reduce the temptation of elected officials to exploit Fannie and Freddie for political reasons (not that they would ever consider such a thing).
Several proposals, in Congress and elsewhere, call for a range of solutions. “There are a number of bills that have several things in common,” says DeMarco, now with the nonprofit Milken Institute, “such as winding down Fannie and Freddie, reducing the amount of the mortgage market that the U.S. taxpayer is backing, bringing private capital back into the market and establishing a common securitization platform, a utility-like entity that would be the basis for mortgage securitization in the future.”
There’s so much money at stake, however, that it could still take years for lobbyists to battle it out and Congress to craft a plan that keeps vested interests happy without alienating key power-brokers. Wall Street, for instance, wants to get back in the game without burdensome regulations that would impede profits. The real-estate industry worries that more private securitization and a shrinking government role could push up interest rates, discourage buyers and slow the whole industry. Social activists want to make sure there’s still some kind of federal support for low-income buyers who might not meet strict financial standards but are worth taking a chance on.
DeMarco’s best guess is that a decade from now, a new, smaller agency will have replaced Fannie and Freddie, keeping the government involved but giving the private sector a role. “The government is still going to have a hand in how this mortgage market functions,” he says. “Whether that’s through providing guarantees or providing rule-setting or governance of that structure, that’s what’s left to be determined.” For better or worse, Congress is in no hurry to determine it.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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