Congress should overhaul Fannie and Freddie, report

Congress should overhaul Fannie and Freddie, report
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Congress should take the lead in overhauling mortgage giants Fannie Mae and Freddie Mac, a new report said.

The American Action Forum released a new analysis on Monday arguing that any plans to recapitalize the government-sponsored enterprises should be avoided.

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"The best course forward is real GSE reform,” said AAF President Douglas Holtz-Eakin said in the report.

“But in the absence of that, the worst thing is to pursue faux reforms that enable turning back the clock,” he said.

There has been talk among some in the banking industry to recapitalize Fannie and Freddie. But Holtz-Eakin advised against that move because it would probably make lawmakers more reticent to craft long-delayed legislation aimed at reworking the agencies.  

“The proposal is actually dangerous because the paper accounting that shows them accumulating capital reserves will feed the narrative that it is safe to simply turn them lose from government conservatorship,” he said.

“The 'recapitalize and release' crowd has been working hard on this narrative for the past several years; essentially arguing for collective amnesia regarding the crony capitalism, misaligned incentives and overreaching that generated an enormous housing bubble and widespread economic devastation,” he said.

Housing industry experts — mortgage banking and home builder groups — have expressed concern that any attempts to recapitalize Fannie and Freddie would create a congressional backlash that could threaten the stability of the mortgage giants.

Community banks were among the groups that want to allow the mortgage giants to keep their profits and build their capital while congressional action remains stalled. 

Under current law, any profits from Fannie and Freddie are swept into the Treasury Department’s coffers. 

Fannie and Freddie needed nearly $190 billion to stay afloat during the financial crisis.