- The Foundry: Conservative Policy News Blog from The Heritage Foundation - http://blog.heritage.org -
Two Promising Starts towards Ending Fannie Mae and Freddie Mac
Posted By David C. John On March 31, 2011 @ 11:02 am In Enterprise and Free Markets | 13 Comments
After more than a year of delay, the House Financial Services Committee is finally starting work on legislation that will hopefully end Fannie Mae and Freddie Mac, the two housing finance giants that helped to make the housing crisis worse.
Both essentially failed in September 2008 and have been in a conservatorship under control of the Federal Housing Finance Agency since then. Many had hoped that Congress would address these two entities at the same time that it overhauled the financial regulatory system in the onerous Dodd–Frank legislation. But that did not happen.
The House will consider two approaches to dealing with Fannie Mae and Freddie Mac. They include a single comprehensive bill by Rep. Jeb Hensarling (R-TX) that would shrink Fannie Mae and Freddie Mac and a reported package of eight separate bills sponsored by Rep. Scott Garrett (R-NJ) that would accomplish approximately the same thing.
Both approaches are important moves in the right direction and would make it less likely that taxpayers would have to finance another bailout of the two entities. In addition, both would replace quasi-governmental interference in housing finance with private-sector companies that would be free of government subsidies and attempts to use them to achieve social goals.
Hensarling and Garrett both propose significant steps that would gradually shrink Fannie Mae and Freddie Mac while encouraging the private sector to return to housing finance. The gradual approach is important since the housing market is still very weak, with about 90 percent of all mortgages still being financed through Fannie Mae and Freddie Mac. While their eventual elimination is essential, a too-rapid closure would further disrupt an already unsettled market.
Hensarling’s GSE Bailout Elimination and Taxpayer Protection Act, HR 1182 , co-sponsored by Financial Services Committee Chairman Spencer Bacchus (R-AL), would place a two-year limit on the current conservatorship and end the various affordable housing mandates that Congress imposed upon Fannie Mae and Freddie Mac. It would also place a $700 billion cap on the size of their portfolios and shrink them to $250 billion each over the next five years. Private-sector competitors would be encouraged to re-enter the market by reducing the maximum mortgage size that Fannie Mae and Freddie Mac could purchase and repackage into mortgage-backed securities and by gradually increasing the guarantee fee charged by them. Increasing the guarantee fee, which protects buyers of bonds created by packaged mortgages if the homebuyer defaults on the loan, will force Fannie and Freddie to compete on a more level playing field with private-sector financing.
Garrett’s reported package of eight bills  takes many of the same steps to phase out Fannie Mae and Freddie Mac and to encourage private competitors. It also increases the guarantee fees and requires both to reduce the size of their portfolios to no more than $250 billion over five years. It would also eliminate affordable housing goals and prohibit both from entering new lending markets. In addition, Garrett’s package tightens existing restrictions on both entities by strengthening federal oversight and reduces pay at both entities to the same level as federal employees. Both Fannie Mae and Freddie Mac have been well known for their generous pay levels.
A key problem with both approaches is that neither guarantees the end of Fannie Mae and Freddie Mac. This is likely to be the end result of both, and the Hensarling bill does allow for both to go into receivership (a formal seizure of both entities that would be followed by a resolution process, which could include liquidation if they cannot be proven to be viable going forward). But neither formally breaks up the remains and closes or sells them to private-sector competitors. While both steps would shrink Fannie Mae and Freddie Mac , Congress should ensure that taxpayers don’t end up paying for another huge bailout by also formally and permanently ending both entities.
Article printed from The Foundry: Conservative Policy News Blog from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2011/03/31/two-promising-starts-towards-ending-fannie-mae-and-freddie-mac/
URLs in this post:
 HR 1182: http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.1182
 eight bills: http://www.washingtonpost.com/business/economy/gop-lawmakers-to-unveil-own-plan-to-wind-down-fannie-mae-freddie-mac/2011/03/28/AF7QpCrB_story.html
 Fannie Mae and Freddie Mac: http://www.heritage.org/Research/Reports/2011/02/End-Fannie-Mae-and-Freddie-Mac-to-Build-Tomorrows-Housing-Finance-System
Copyright © 2011 The Heritage Foundation. All rights reserved.