Roles for Fred­die, Fan­nie up for re­view

White House sets con­fer­ence to get sug­ges­tions for re­form be­fore propos­ing leg­is­la­tion

Austin American-Statesman - - BUSINESS & PERSONAL FINANCE - By Kevin G. Hall

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.

Ti­mothy Gei­th­ner

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