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News Flash: Fannie, Freddie Kaput

The GSEs are dead, long live the GSEs.



) - For the first time in almost two years, some actual news came out of Washington about

Fannie Mae



Freddie Mac



The Treasury Department held a

press-and-policy-maker event on Tuesday to start the discussion about housing-finance system reform. High-profile experts representing the government, borrowers and various parts of the industry were featured speakers in panel discussions.

The crib notes are thus: The Fannie-Freddie model of housing-finance is kaput; the new system will almost certainly include (explicit) guarantees on certain types of residential mortgage-backed securities to help middle-class borrowers; and low-income borrowers will be

incentivized to rent until they can afford to buy.


These are the kinds of things that have been

vaguely suggested by the power set in Washington and the bankers on Wall Street for the past couple years of uncertainty. But now they've nearly been said explicitly, and with the molasses-like speed of Capitol Hill progress, that's saying a lot.

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"This is a test for Washington," said Treasury Secretary Tim Geithner, after his keynote speech. "The stakes are high."

Most of the official news on policy came from reading between the lines of Geithner's speech. The Treasury Secretary indicated that Fannie and Freddie will die -- albeit with an "elegant funeral" -- and their legacy portfolios will be wound down. While he didn't outline any explicit policy objectives, he said "I believe there is a strong case to be made for a carefully designed guarantee."

With widespread industry support for such a move, it's nearly certain that Fannie and Freddie will be replaced by a system that's similar but with important distinctions: No "hybrid" structure where shareholder gains are subsidized by taxpayer support; an explicit guarantee on debt, rather than an assumed one; pricing on guarantees that's more favorable to taxpayers; and capital requirements that give private players a chance to compete in the mortgage-buying space.

Beyond that, in group sessions after the main panel discussion, conversation was dominated by the various interests who have a stake in housing reform.

Representatives from

Bank of America

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Wells Fargo

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JPMorgan Chase

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(PNC) - Get PNC Financial Services Group Inc. (The) Report



(C) - Get Citigroup Inc. Report


U.S. Bancorp

(USB) - Get U.S. Bancorp Report


Morgan Stanley

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(BLK) - Get BlackRock Inc. Report


State Street

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and a variety of other firms were there to offer the "industry"'s side of the story. Then there were the buyers of mortgage bonds outside the banking industry, like

Bill Gross, chief investment officer of



PIMCO, who manages its most prominent bond fund; and Bill Irving, who manages a big fixed-income fund for Fidelity. The Chamber of Commerce was there to represent the non-bank industry side, which will see economic effects of major housing-industry changes as well.

"Main Street" was represented by a variety of officials from the Treasury, HUD, Federal Reserve, FDIC, legislative offices and consumer groups as well. Civil-rights advocate Marc Morial, who heads the National Urban League, took umbrage at the suggestion that low-income borrowers had played a key role in the housing downturn. He characterized them as victims who have been taken advantage of and suffered greatly, rather than as naïve or irresponsible borrowers.

"Now we not only have Wall Street and Main Street, we have Back Street," said Morial, in an attempt to coin a new term that represents low-income borrowers who could barely make ends meet pre-crisis, and now have little recourse.

One of the key speakers was Lewis Ranieri, whom the Treasury Department dubbed the "father" of mortgage-backed securities. Ranieri was arguably the chief architect of the current system during his days at Salomon Brothers in the 1980s, which are well-documented in the book "Liar's Poker."

Ranieri struck an initial tone of apology, saying "I feel like Marc Antony here overseeing his funeral," but eventually blamed the government for lack of oversight, rather than finding fault with the notion of securitization.

"That's why we needed the ratings agencies to do what they were supposed to do," he said, to chuckles. "That's why we needed the regulators to do what they were supposed to do. That's why we needed the SEC to really crack down on RMBS."

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U.S. Mortgage Crisis

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In a smaller meeting following the broader panel discussions, Ranieri said that the government was a necessary entity for housing finance. According to him, despite all the novel ideas, and the trials and tribulations of floating-rate loans over the years -- from so-called "NINJA" loans, which didn't require documentation of income or assets, to so-called "bullet" loans, which leave most of the repayment for the end of term -- none has worked as effectively as a 30-year-fixed, backed by the federal government.

"We never had a floating-rate loan not blow up on us," said Ranieri, later adding that "You have nothing to prove to me that that's not going to blow up in your face."

-- Written by Lauren Tara LaCapra in Washington, D.C.


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.