A Proposed Reboot for Fannie and Freddie

By Brian Summerfield, Online Editor, REALTOR® Magazine

A proposal to take Freddie Mac and Fannie Mae’s bad assets off the books and restructure the two organizations is scheduled for discussion at the White House’s National Economic Council today. A central part of the plan is the creation of a permanent, government-supported “bad bank” that would always be there to back up Fannie and Freddie by absorbing any toxic debts. (This idea originated with James Lockhart III, the chief regulator of the two companies and head of the Federal Housing Finance Agency, who recently announced that he’ll be stepping down from that role at the end of this month.)

Proponents of the move say this would shore up the organizations and get them funding mortgage loans again, which they haven’t been doing much of since their near-collapse in the summer of 2008. (The Federal Housing Authority has stepped up to fill some of the vacuum left by this breakdown in the mortgage lending system.) By reducing both bad assets and risk, Fannie and Freddie would be in a position to resume their roles as the prime movers of the mortgage market, which would in turn boost the housing sector and, ostensibly, the entire economy.

However, there are potential problems with the plan. For one thing, it’s going to mean a large and enduring government presence in mortgage lending. While Fannie and Freddie were created by the feds, they were both run as private institutions with a considerable level of autonomy prior to last year, when the market bust led to a government takeover.

With this new set up, “ownership” of Fannie and Freddie likely wouldn’t change, and government involvement in the operations of these organizations probably would increase. Free-market advocates would argue that transferring control of the mortgage lending system from the private sector to government hands is a perilous proposition, and would invite inefficiency and mismanagement. (Of course, backers of this approach could argue that Fannie and Freddie were mismanaged during the height of the housing boom, when they were privately operated.)

Also, there could be problems that stem from moral hazard. Essentially, borrowers might be more inclined to take on mortgages they can’t really afford and default on those loans — and lenders might be willing to take more chances on unfit borrowers — in a “bad bank” system that everyone knows is ultimately propped up by tax revenues.

Whether you’re in favor of this proposal or not, there’s really no disputing that major changes to Fannie and Freddie are necessary. In fact, we’ve written about the need for an overhaul before.

Our question for you: Do you think wiping Fannie and Freddie’s slate clean and giving them a dumping ground for their toxic loans is a good move? Or should there be some other combination of regulation and restructuring? Or should the organizations have to climb out of the hole they’re in on their own, and accept a reduced role in mortgage lending for the foreseeable future?

Brian Summerfield

Brian Summerfield is Manager of Business Development and Outreach for NAR Commercial and Global Services. He can be reached at bsummerfield@realtors.org.

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  1. Patricia Anglin

    I think it should be restructured in a different manner than what’s currently being considered. I’m not in favor of a “clean slate”. There needs to be accountability. As for how I recommend that be done, that will require more thought!

  2. Diemmy Wandrocke

    Lets not kid ourselves. Fannie Mae and Freddie Mac have always been quasi government agencies. They were always under gov rules and mandates. Was it not the mandates of CRA to lend a certain quotas in certain areas that help to get us here in this predicament? What it not also the close tie with Barney Frank that led these two institutions to step up the amount purchases of bad mortgages? With the proposed structure, there’s more incentive for these two institutions to continue to make bad loans and buy more bad loans…THE TAX PAYERS ARE THE LOSERS IN THIS PROPOSAL. There’s got to be accountability in any restructuring plan for these two institutions.

  3. Steve Owen

    If “clean slate” means shut them down, then that is what I am in favor of. Fannie and Freddie should be broken up and any viable assets sold to the private sector. If they were broken up into smaller entities, they could lose their prior quasi-government status and become free-market entities. Ultimately, that would result in a mortgage system based upon real economics rather than a government fairly tale.

  4. Richard

    Clean slate is fine but going forward Fannie and Freddie need to cancel all high risk mortgage programs (If they haven’t already). They also need to increase their audits on new loans coming in so they don’t get stuck with more bad assets. Remember, Fannie and Freddie don’t originate the loans they only buy them from approved lenders and these lenders should be required to increase their pre-funding quality control including a meaningful appraisal review program. Just a little common sense.

  5. Dan Ross

    Ok! Here is my view.

    Daniel Mudd & his Croanies were ordered to pay back their lavish Bonus’s they rec’d or face possible jail time. What was the outcome of that Hush Hush?

    I feel they helped collapse Fannie. Underwriting Guidelines through Du & Lp have been usully very relaible & the LTV’s may have been low but very few FORECLOSURES RESULTED FROM A PAPER LOANS. Most of the problems w/o rehashing had been from the 100% 2/28 loans which caused this Freddie & Fannie had no Business buying any of those loans. No they should not get a clean slate & I feel New Gov’t Guidelines like HVCC & Overseeing Fannie & Freddie is great..

    New tighter Fico Scores & 90% LTV are only going to Increase FHA to get more business. FHA raised the Fico’s to 620 which is good. Fannie & Freddie need to go back to maybe 680 scores w/good Job history since most of the Consumers have had divorces & lay-offs ect. Also make it a requiremnet any Home over 5yrs get inspected.b4 buying, so consumers don’t get stuck w/high repair bills which could also result in Mort. defaults. Also go after Loan Officers & Brokers ect who may have committed faud to get the deals done. On the whole I feel things will balance out in the next few yrs. This happen once b4 here in Houston Tx in mid 80’s w/ negative Amortization loans w/100% financing. If u Bought a home for $100k 5 yrs later you owed $125k w/adj Mort. & the Home w/worth still $100K this resulted in a complete collapse of Houston’s market, Homes that were worth $225,000 – $300K sold for 50% of original Sales Price.

    Keep our fingers crossed & get rid of th Crooks we will be fine. Dan Ross CRS//GRI Mort & R.E Broker Hou Tx

  6. Wanda Harmon

    Untill someone does something to differentiate between areas, nothing is going to compute. I think VA loans should be the only Government lender. Also free market is the only thing that works. The Government should be looking into profiteers of the sudden collapse. That would be a good role for them. People are still in shock and stunned, as to how the market collapsed so suddenly and why realestate was given such confidence just prior to the collapse by the media. It is not good for the market to appear that renting is the way to go – devoid of taxes. Automated appraisals are forced and inaccurate.