The Future of Fannie and Freddie?

The National Association of Realtors has put together a proposal for converting Fannie Mae and Freddie Mac into government-owned non-profit agencies, a move the industry trade group feels is essential to keeping the lowest mortgage rates available to most American home buyers. According to the Wall Street Journal, the proposal isn't expected to be popular, and many lawmakers want to make sweeping changes to the mortgage giants before cutting them loose from government support altogether. Both the privatization option and the non-profit option would mean major alterations in the way business is done by the backers of over half of all American home loans.

Senator Barney Frank has still another opinion, arguing that the government sponsored enterprises (GSEs) should be abolished altogether in favor of a brand new housing finance system. Any solution will have to be aimed at increasing investor confidence in mortgage-backed securities, necessary for keeping mortgage markets liquid and mortgage interest rates as low as possible.

The Realtors' proposal would not alter the companies' mandates to continue supporting affordable housing, nor would it limit the size of mortgage portfolios they could amass. It seems that there would be little separating Fannie and Freddie from FHA, which is experiencing unprecedented losses of its own. This overlap, plus theabsence of controls to prevent the mortgage giants from becoming too big to fail, are likely the major causes of the lack of support the proposal has received -- the NAR's powerful Washington lobby notwithstanding.

Clearly the GES's old business model is unsustainable in the eyes of the bailout-weary public. Being able to take private profits, yet generate public losses no longer sits well with the taxpaying public -- nor its representatives in Congress. Meanwhile, former Treasury Secretary Henry Paulson said in a speech in Chicago that it's "highly likely" the two organizations will be restructured -- just not yet. "We very much need Fannie and Freddie today to get us through this crisis," he added. But while it's "not advisable" tooverhaul them today, "I don't think anybody believes that the government essentially guaranteeing all our mortgages is right or sustainable." After the market settles down, he said, "They should at a minimum be scaled way back."