Why Fannie and Freddie are sticking around

February 11, 2011

The Obama White House finally has a kinda-sorta housing plan. But here is the thing: Fannie Mae and Freddie Mac, seized by the U.S. government back in 2008, don’t possess the political clout they used to. But the two mortgage finance giants still have a network with shared interests. That lingering influence is a big reason why they — or possibly similar-looking replacements — will be around for a while longer.

The White House and congressional Republicans agree that housing finance, a big contributor to the recent financial crisis, needs a sweeping overhaul. That includes dramatically reducing or eliminating the role of Fannie and Freddie, which have soaked up more than $150 billion in taxpayer aid since the federal takeover. But it looks like President Barack Obama’s team can’t decide on a single plan and will instead offer a menu of options for reducing government’s role in housing. And while the GOP is adamant it wants to wind down Fannie and Freddie as soon as possible, it doesn’t seem ready to start quite yet.

Rash moves are unwise when U.S. housing remains mired in a deep downturn. But all the Washington waffling isn’t a sign of prudence. A reform roadmap is way overdue. Unfortunately, inaction is tempting when pain is near and benefits distant. Democrats and Republicans are also up against an onslaught from the potential losers if the government ends or sharply reduces its support of the residential mortgage market — currently channeled through Fannie and Freddie.

And there are plenty of those folks. Real estate agents and homebuilders, of course, want housing credit to be as widely available as possible. The very existence of mortgage insurers depends on Fannie and Freddie’s requirements. Big banks are used to offloading mortgages via the securitization market which, though currently in the dumps, was formerly greased by the safety and uniformity of the government backstop. Small banks, meanwhile, worry that big banks would dominate a private-sector mortgage market. And mortgage bond investors are fearful of even a gradual removal of government support.

Overall, the real estate industry gave nearly $70 million to candidates in the most recent congressional election cycle, according to the Center for Responsive Politics. Together with the other constituencies, there’s considerable juice to stymie legislation. Sadly, the biggest hole in financial reform may continue to gape at least until the next Congress takes office in 2013.

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“Everyone wants to get to heaven, but no one wants to die”

Funny how when it comes to embracing risk the ones who exalt the private sector seem to find a role for government.

Posted by ARJTurgot2 | Report as abusive