Getting out of a bad relationship can be tricky, especially when money is involved. And for the federal government, the billions it has spent to bail out Fannie Mae (Stock Quote: FNMA) and Freddie Mac (Stock Quote: FRE) could very will push it to sever ties with the mortgage finance companies.
“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” Treasury Secretary Timothy Geithner said at a conference held in Washington to discuss the future of housing finance. “And I think it's worth stepping back and asking the basic questions: What went wrong over the past few years? And what are the most important flaws in the system that we have to fix?”
Here’s looking at you, Fannie and Freddie.
The companies, which buy mortgages from banks to resell to investors as securities, have carried on a sordid affair with the federal government during the past 50 years. Originally created by the Roosevelt Administration to back mortgages during the Great Depression, Fannie and little brother Freddie were, for a stretch of time, publicly held. During their years on the market, faulty lending practices, bolstered by a need to stay competitive in the housing market, led the firms to amass $5 trillion in debt. This, in turn, forced the government to intercede.
They were taken over by the Treasury at the height of the financial crisis in 2008. Since then, the government has lent both firms more than $150 billion.
While members of Congress and analysts have been decrying the government’s relationship with Fannie and Freddie for years, Tuesday’s conference marks the first time that the Obama administration took a firm stance on the future of the companies.
“It is not tenable to leave in place the system we have today,” Geithner said. “We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.”
Geithner, who pointed out that Fannie and Freddie did not solely cause the housing market to crash, stopped short of outlining any definitive changes.
“It's safe to say there's no clear consensus yet on how best to design a new system,” he said. “But this administration will side with those who want fundamental change.”
According to the Associated Press, the administration is expected to release a plan sometime next year. A widely held view at the conference was that the government should do away with Fannie and Freddie, and instead provide a guarantee that mortgage investors will be paid even if borrowers default in droves.
"It will take on a different form, but there is a role for government," Kevin Chavers, a managing director at Morgan Stanley, said.
For now, it seems a divorce may well be in the works, but not yet finalized. Geitner asked those in attendance to have patience, adding that taxpayers aren’t being hurt by “taking the time to get reform right” since Fannie and Freddie’s need for financial assistance was a result of what happened prior to their bailout, and not after it.
“There is nothing we can do to decrease the significant loses Fannie and Freddie incurred ahead of this crisis,” Geithner said.”All we can do is to minimize the risk that they get worse.”
The Treasury Department held the conference to give banking executives the opportunity to offer advice on changing the government's role in backing the mortgage market, on a whole. Check out this MainStreet article to learn more about the Treasury Department’s response to their criticism.
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