Keep Fannie, Freddie out of new programs

September 28, 2009

While Fannie Mae and Freddie Mac are still on the government’s dime, they could soon be entrusted with lending a hand to yet another corner of the housing market.

This brings a whole new meaning to conservatorship, and shows that the Obama administration, like its predecessor, is still relying too much on two failed companies to right the wrongs in the housing slump.

Until the government sorts out what to do with these wards of the state and the agencies themselves demonstrate they no longer need state assistance, they shouldn’t be taking part in any new initiatives. Otherwise, they could become even more entrenched and difficult to reform when the housing market finally recovers.

The new program in question would aim to provide as much as $35 billion to state housing finance agencies, which provide low-cost mortgages to potential homebuyers with low to moderate incomes. These agencies have been squeezed hard by rising financing costs and hostile conditions in the credit markets.

The government’s plan would reportedly anoint Fannie and Freddie, together with Treasury, to purchase as much as $20 billion of bonds issued by the HFAs.

Additionally, Fannie and Freddie would act as a backstop for HFA debt known as variable-rate demand notes that carry lower interest rates than traditional long-term bonds, according to the Wall Street Journal. The government would set aside up to $15 billion for that effort.

This isn’t the first time the government has roped in Fannie and Freddie in the name of public service. Six months before they failed, the companies’ regulator, with the blessing of Treasury Secretary Hank Paulson, lowered their capital requirements so they could purchase more mortgages in a bid to stabilize the housing market.

Earlier this year, they featured in programs like the Home Affordable Refinance Program, which helps homeowners refinance into more affordable mortgages, and another initiative that supports loan modifications on existing mortgages that have become too onerous for borrowers.

The amount of the new initiative, which is peanuts next to the more than a trillion dollars spent to prop up the U.S. housing market, isn’t as worrying as the habitual positioning of Fannie and Freddie in the middle of most housing schemes.

For one, their track record is terrible. Not only did they fail as publicly traded companies, but a recent report by the congressional watchdog, the Government Accountability Office, said the enterprises have a “mixed record” in meeting even their housing mission objectives. This is despite the enviable position the agencies enjoyed before the crisis, when the implicit government guarantee gave them access to much cheaper financing than other financial institutions.

The program under consideration now seems particularly egregious since the Treasury could most likely find a way to provide all of the funds to backstop the HFA debt itself.

But that could prove politically tricky, since Treasury and the Federal Reserve are now in the business of exiting support programs, not creating new ones.

The priority for the administration should be deciding what to do with the agencies — nationalize them, privatize them, wind them down or return them to their old status — not including them in yet another housing program.

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