By  Tue Jan 14, 2014

Congress Debates Plans for Fannie, Freddie

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Mark Fischer/Flickr source

Congress, after the 2008 financial bailout of mortgage backers Fannie Mae and Freddie Mac, is once again weighing plans on what to do with the two government-subsidized giants. Some members of Congress favor privatization of the companies, while others favor putting a new structure for how the government would reinsure the mortgage-backed securities packaged by the companies.

Fannie Mae and Freddie Mac don’t make loans, but rather buy them from lenders and package them into securities which they guarantee and are government-insured. The two companies were once private, until steep losses during the financial crisis prompted the federal government to infuse $188 billion to prop up the companies and avert a greater financial collapse.

The companies now have become profitable with the slow but steady increases in the housing market and stricter lending criteria. They own or back about $5 trillion in mortgages and have recently made a $39 billion quarterly payment in dividends to the government and both have paid off nearly all of the original bailout money.

Debate in Congress

However, many in Congress still wish to privatize the companies. Some feel the companies stifle competition in the mortgage market and want to level the playing field. The two companies are responsible for six of every 10 mortgages written in the U.S. and are designed to allow low-income buyers into the housing market at low interest rates.

In Nov., investor Bruce Berkowitz of Fairholme Capital Management LLC made a proposal to invest in the two mortgage giants. Dubbed the Fairholme plan, the company, which already owns $3.5 billion in Fannie and Freddie assets, would have recapitalized the two agencies.

The Obama administration rejected the plan. At that time, during a conference in Washington, Gene Sperling, director of the White House’s National Economic Council, stated, “I want to make clear our administration believes the risks are simply too great that this would re-create the problems of the past.”

Sperling said the administration feels the proposal didn’t do enough to address the problems which created the scenario in which the companies were too big to fail, namely that the companies under the new structure would still dominate the market and concentrate the risk.

Many in Congress favor winding down the two companies but not all agree on how to replace them. Some want to provide a new way to provide government-backing of loans, while others want the government out of the business of backing home loans altogether with the argument that tax payers may once again get stuck holding the bag if another collapse of the housing market occurs.

A bipartisan effort led by senators Mark Warner (D-VA) and Bob Corker (R-Tenn.) is an attempt to shut down Fannie and Freddie over the course of five years and replace them with a new government agency funded by industry fees.

“No matter how you dress it up, it pretty much ends up with private-sector investors doing well when times are good and taxpayers on the hook when times are bad, and I just don’t see how that is sustainable,” Warner said.

Others in Congress are in no hurry to shut down Fannie and Freddie as the companies are profitable and dismantling a system in which holds 60 percent of all mortgages is a daunting task. Some legislation being considered is designed to make the process of shut down very slow so it doesn’t hurt the recovering housing market by making loans harder to get.

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