The debate over Fannie and Freddie’s future under way

Almost immediately after Fannie Mae and Freddie Mac were bailed out, the fight over their future had begun on Capitol Hill.

Key Republicans called for an end to the mortgage giants’ unique structure as private companies with the implicit backing of the federal Treasury. They say the companies should be put up for sale, and left solely to the vagaries of the market once they recover.

ADVERTISEMENT
“I would hope that’s what will be done,” said Sen. Richard Shelby (R-Ala.), the Senate Banking Committee’s ranking member, who had called for reforms in Fannie and Freddie’s oversight years before this year’s crisis.

“Once they’re steady and they’re financially viable, we need to downsize them and sell them off. The government needs to get out of that business.”

Democrats disagree, and suggest that Republicans’ anti-government ideology is blinding them to the need for Fannie Mae and Freddie Mac. They say the two companies have helped increase home ownership, and they question what would replace them.

The takeover of Fannie and Freddie, which could cost more than $100 billion depending on the future performance of the housing market, has instigated a debate over what the companies should look like when they emerge from government control.

That debate is taking place without Fannie and Freddie’s in-house lobbyists, who once had unrivaled influence in Washington, earned in part by the mortgage giants’ political action committee donations and millions of dollars in charitable contributions.

They’ve stopped communicating with Capitol Hill for fear of violating the no-lobbying policy, according to a Democrat who lobbies on housing issues.

The lobbyist said some implicit government backing would be needed to provide the liquidity in lending markets, and that while the two lenders were mismanaged, that didn’t mean they don’t serve a legitimate role.

“It’s like a kid who gets straight A’s and then gets a DUI. Is the kid [messed] up? No, he made a mistake.”

Tighter regulation of the lenders once they emerge is all that’s needed, the lobbyist said. “You can’t just get rid of Fannie and Freddie,” he said.

With the implicit backing of the government, Fannie and Freddie guaranteed or purchased home loans, which in turn allowed banks to issue more mortgages. That added, supporters say, to the liquidity of the market.

But Shelby dismissed fears about a loss of money flow in the housing market if Fannie and Freddie are completely privatized.

He compared the current situation to the actions Congress and the Nixon administration took in 1974 to take over several bankrupt railroads. The lines were incorporated as Conrail and the government nursed the railroad back to health, but then broke it up in the late 1990s.

“We’re not going to do this now,” Shelby said. “We ran railroads for a while, which we don’t like to do, and we ultimately spun them off, and it worked. But the sooner we get the government out of the banking business, the better off we’ll be.”

{mospagebreak}Sen. Tom Coburn (R-Okla.), a fiscal hawk, blamed the implied government support behind Fannie Mae and Freddie Mac for the bailout. The backstop allowed the lenders to grow too large.

“We’re in this trouble because it was half-government and half-private,” Coburn said. “It’s a private function, and that’s the real answer here. So I hope we don’t repeat this. When it’s all said and done, there shouldn’t be public ownership of mortgages.”

Although the entities already operate as private companies, Senate Banking Committee Chairman Chris Dodd (D-Conn.) said the implied government support behind the mortgage giants provided stability to the home loan market. In total, Fannie and Freddie owned or guaranteed around $5 trillion in home loans.

ADVERTISEMENT
Commenting immediately after the takeover, Dodd suggested the Bush administration had engineered the move as part of an “ideological thrust” to privatize it.

“I’ve been around here long enough to know there are people who want to get rid of them, for years,” Dodd said. “Is that’s what’s going on here? If it is, I think the burden falls on them to describe what they’re going to put in its place. And if their argument is we don’t need anything in its place, then you just dealt a very severe blow to the residential mortgage market and homeownership in this country.”

Majority Leader Harry Reid (D-Nev.) also defended Fannie and Freddie’s role in the mortgage market.

“I am a believer that Fannie and Freddie, since the 1930s, when we … started the first of these organizations, have been extremely helpful,” Reid said.

Minority Whip Jon Kyl (R-Ariz.) downplayed the possibility of any immediate reorganization of the two entities. He said Congress and the new administration will decide the lenders’ fates.

“There are a lot of consequences to electing a president of the United States, all the way from Supreme Court justices to decisions like that,” Kyl said. “If John McCain is elected, John McCain gets to make calls as president. But Congress still has significant handles on things like this.”

Off Capitol Hill, housing lobbyists say there is no immediate possibility of a dissolution of Fannie Mae and Freddie Mac. But that possibility will be a coming fight next Congress.

“There should be a rigorous debate over the role and structure of the GSEs [government-sponsored enterprises] when they come out of this current crisis,” said Paul Leonard, a lobbyist with the Housing Policy Council.

“Should it go back to its current form? Should it be a hybrid? Should it be a purely government entity? Or should it be purely private? There are a lot of questions like that.”

“We’re in uncharted waters now,” said Sen. Bob Casey Jr. (D-Pa.), a member of the Banking Committee. “We have to think through what the conservatorship means, and there’s no textbook for this.”