Roles for Freddie, Fannie up for review
White House sets conference to get suggestions for reform before proposing legislation
WASHINGTON — With the overhaul of financial regulation in the bag, the Obama administration on Tuesday said it will focus next on housing finance — another key cause of the recent deep economic downturn — with an eye toward deciding the fate of U.S.-controlled mortgage finance titans Fannie Mae and Freddie Mac.
The administration said in a statement that it would hold a Conference on the Future of Housing Finance at the Treasury Department on Aug. 17 to seek input for legislation to reform the rules governing mortgage finance and the markets for bonds backed by U.S. mortgages. The White House pledged to send that legislation to Congress in January. The announcement didn’t quiet critics. “Better later than never,” said Alex Pollock, a scholar at the American Enterprise Institute, a conservative research group. “It is still my opinion that you cannot write a 2,300-page bill and not address Fannie and Freddie on the somewhat dubious excuse that it is too complicated.”
President Barack Obama has said he’d tackle Fannie and Freddie — which are both chartered by Congress and were placed in government conservatorship in September 2008 — separately from Wall Street because he is reluctant to make significant changes while the housing market remains weak and continues to slow the economic recovery.
Existing home sales fell 5.1 percent in June and are expected to decline again this month. Most economic analysts now expect the housing market to bottom in 2011, five years after the crisis began.
Fannie Mae was created in 1938 to boost home ownership after the Great Depression, and Freddie Mac was created in 1970 to provide more competition for Fannie Mae.
The two congressionally chartered private entities traditionally buy mortgages originated by lenders and pool them into bonds
backed by U.S. mortgages. This frees banks and other mortgage lenders from having to retain the loans on their books and allows them to keep lending to homebuyers.
Fannie and Freddie guarantee about 31 million U.S. mortgages, collectively representing about $5 trillion in mortgage debt.
Early in the past decade, Wall Street banks aggressively pushed their own secondary market for mortgage bonds, called private-label mortgagebacked securities. Those banks captured significant market share from Fannie and Freddie, in part because lending standards eroded significantly and Wall Street entities had looser controls and fewer demands on mortgage originators than did the quasi-government entities.
Together, the Wall Street banks, Fannie and Freddie supported a massive and ultimately unsustainable expansion in homeownership during the first half of the past decade. When the na- tional housing market began to implode in 2006, reverberations shook housing finance to its core and led the government to seize Fannie and Freddie.
Critics of Fannie and Freddie want the government eventually out of the mortgage finance business.
“At the end of this thing, there needs to be a private conforming mortgage market. It’s never existed,” Pollock said. He said that conventional mortgages given to safe borrowers should be pooled together by private firms.
Treasury Secretary Timothy Geithner said Sunday that he envisions some government role at the end of the housing-finance overhaul process.
“I think we’re not going to preserve Fannie and Freddie in anything like their current form. We’re going to have to bring fundamental change to that market. But I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession,” he said.