Do You Hear What I Hear?

BLOG VIEW: In the past month, a new chorus has begun to take shape, and its loud voices are singing a fatalistic tune: the elimination of Fannie Mae and Freddie Mac.

Is that position too extreme? Perhaps, but neither government-sponsored enterprise (GSE) is doing much to justify its continued existence. The recent first-quarter data is particularly disastrous: Fannie Mae reported a net loss of $11.5 billion during the first quarter while Freddie Mac lost $6.7 billion in the same period. The GSEs' regulator, the Federal Housing Finance Agency, is asking the Department of the Treasury for more money to prop them up: $8.4 billion for Fannie Mae and $10.6 billion for Freddie Mac.

The administration, which initially promised to address the GSE question earlier this year, abruptly backpedaled last February and decided to put the matter on the proverbial back burner until next year. The Republican leadership in the Senate, however, does not want to wait that long, and it recently put forth the GSE Bailout Elimination and Taxpayer Protection Amendment as part of the financial regulatory reform legislation that is currently being debated.

The Republican amendment set clear-cut deadlines: ending the GSEs' conservatorship in two years, which then leads to a three-year period for the GSEs to function under new operating restrictions worked into their government charters. After three years, their charters expire, and they have 10 years to form a separate holding corporation and a dissolution trust fund for whatever remaining mortgages or debt obligations they are still holding.

It was something resembling a solution, but the partisan rancor in Congress doomed it to rejection in a full Senate vote. However, there are other voices beyond Washington that want GSE to go even further and deeper – they want to see the GSEs shut down now, not in the next decade or beyond.

In his speech before his bank's annual shareholders meeting in April, Robert G. Wilmers, chairman and CEO of M&T Bank Corp., argued against having the GSEs. To drive his point home, he noted how a neighboring country got along quite well without GSEs.

‘Canada doesn't have the equivalent of Fannie and Freddie,’ said Wilmers. ‘Nor does it permit the deduction of mortgage interest from an individual's taxes. Nevertheless, its home ownership rate is 68%. Canadian banks have weathered the financial crisis particularly well and required no government bailouts.’

Arthur D. Warga, dean of the C.T. Bauer College of Business at the University of Houston, also cited a parallel example in a May 1 editorial in the Houston Chronicle. ‘The Obama administration has already started moving in the right direction by eliminating private intermediaries in the student-loan business,’ he wrote. ‘The result will be savings that will help pay for more loans for college students. As the administration and Congress consider the future of mortgage finance, my advice to them is clear and loud: Eliminate Fannie Mae and Freddie Mac.’

Matt Koppenheffer, a columnist with the influential Motley Fool website, was even more blunt. ‘Let's go ahead and put Fannie Mae and Freddie Mac out of their misery,’ he wrote. ‘Unfortunately, this can't happen particularly quickly because of their size and entrenchment in the system, but setting a timetable of a decade or so to defuse these financial nukes seems like it would be a big positive.’

Can we expect to see Fannie and Freddie on a list of extinct agencies? It seems doubtful, at least in the current political climate. Even Wilmers acknowledged that by stating, ‘The mortgage market has come to be structured around Fannie and Freddie, and powerful interests are allied with the status quo,’ he said.

But waiting until 2011 to address this subject is a major mistake. Sen. Mitch McConnell, R-Ky., the minority leader in the Senate, said it best: ‘In my view, it's simply not acceptable for some on the other side to suggest that we have to rush [the regulatory reform] bill through Congress, but that it's okay to wait another year to address the GSEs, which we all know played a central role in the financial crisis.’

Doing nothing about GSE reform is unacceptable. But unless there is an intelligent counter-proposal on the future of Fannie Mae and Freddie Mac, there will be more voices calling for their elimination.

– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]

[i] (Please address all comments regarding this opinion column to[/i]


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