Proposal Calls for Fannie, Freddie to Be U.S.-Owned Nonprofits
By Nick Timiraos
The Wall Street Journal
February 23, 2010
An influential real-estate trade group is calling for the government to convert Fannie Mae and Freddie Mac into federally owned nonprofit corporations that would largely leave the mortgage-finance giants intact.
The proposal from the National Association of Realtors is likely to meet stiff political resistance because the companies have required a $111 billion bailout, and lawmakers are under pressure to demand sweeping changes. But the recommendations also underscore how difficult it will be for policy makers to dramatically reshape the two companies, which own or guarantee half of the nation's $11 trillion home loans and are playing a critical role in providing liquidity to the battered housing market.
The Realtors plan, which has been circulated among policy makers but hasn't been publicly released, is the latest to call for the government to make explicit guarantees for certain mortgage-backed securities. That would replace the longstanding implied guarantee on the companies' debt that allowed them to borrow cheaply until some foreign investors lost confidence in that guarantee as losses mounted two years ago.
The policy proposal adds to a growing consensus among some academics, investors and housing analysts that the federal government should continue to play a role in the U.S. mortgage market. So far, few have called for as large a government ownership role as the Realtors.
The White House hasn't weighed in over the long-term plans for the companies, though senior officials have said they don't favor resurrecting that assumed debt guarantee. On Tuesday, Rep. Barney Frank (D., Mass.) postponed a hearing on the future of the housing-finance system that had been set for next week, citing a scheduling conflict. The hearing was to feature testimony from top administration officials.
Facing a bailout-weary electorate, politicians from both parties have promised to dramatically shake up both companies. Mr. Frank, a longtime supporter of the companies, said last month that he would recommend "abolishing" the firms and replacing them with an entirely new housing-finance system.
Still, the Realtors proposal argues that the companies shouldn't be heavily restructured. The Realtors' association is one of several industry groups with an interest in protecting the hallmark of the U.S. housing-finance system: the low-cost, 30-year fixed-rate mortgage that Fannie and Freddie helped finance. The report says that the companies' "existing infrastructure" makes them best positioned to become nonprofit government corporations.
"Despite their troubles, they created a lot of good...by making capital more liquid and by making mortgages more available," says Lucien Salvant, an association spokesman.
The proposal is sure to face resistance from critics of Fannie and Freddie, including some Republicans who argue that the companies should ultimately be privatized.
But even some longtime critics say it is unrealistic to expect Congress to take drastic action. "Congress is going to ultimately say, 'We have something that we know has worked in the past, and we don't have anything right now,' " says Peter Wallison, a fellow at the American Enterprise Institute who supports privatization. "As policy makers weigh the alternatives, they will be under pressure to re-establish Fannie and Freddie."
The Realtors' proposal wouldn't significantly alter two of the more controversial components of the companies' infrastructure: their mandate to support affordable housing goals and their ability to maintain large investment portfolios. Critics say those elements fueled poor decision-making that contributed to their spectacular collapse.
The proposal would require the firms to reinvest their profits to build capital reserves so that they could maintain lending during economic crises. Fannie and Freddie would be self-funded, and their chief executives would serve fixed terms to avoid political interference.
Any government-owned corporations might duplicate existing functions provided by the Federal Housing Administration, which insures loans, and Ginnie Mae, a government-owned corporation that guarantees payments to investors on securities backed by FHA- and other government-insured loans.
The FHA faces rapidly rising losses on loans it insured and is scrambling to avoid its own taxpayer bailout. Officials have said that the agency didn't have proper tools to manage risk as the private mortgage market collapsed and that government pay-scales have made it harder to recruit top talent.
Government control of Fannie and Freddie has already created awkward tensions. On Thursday, the head of the Federal Housing Finance Agency, the companies' government regulator, is expected to face tough questioning before a congressional panel over his approval of multimillion compensation packages for top executives at the companies.
"It's essential that we've got people that know what they're doing," says Edward DeMarco, the agency's acting director, because the companies have more than $5 trillion in mortgage holdings backed by taxpayers.
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