The Fannie & Freddie Problem: Let’s Talk It Out

By Alex Pepper

Aug 17, 2010 4:48pm

ABC News' Matthew Jaffe reports: One key issue left out of the Obama administration’s sweeping Wall Street reform bill was any attempt to wean government-backed mortgage giants Fannie Mae and Freddie Mac off of federal support. Much to the chagrin of Congressional Republicans, that debate was put off until next year. But today the administration kicked off its efforts to build a stable housing finance system without huge government help by holding a conference in Washington. It won’t be easy – the government now backs more than 90 percent of the multi-trillion dollar mortgage market. And Fannie and Freddie have sucked up nearly $150 billion in taxpayer aid. “Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” Treasury Secretary Tim Geithner said in his opening remarks at the Department’s event this morning. “We need to begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages,” he said. “To be clear,” said Department of Housing & Urban Development Secretary Shaun Donovan, “the government’s footprint in the housing market needs to be smaller than it is today.” But with the housing crisis still acute in many areas across the country, getting the government out of the mortgage business – without worsening the crisis – will be no small feat. Further complicating matters is the partisan divide in Washington. After Treasury last year essentially gave Fannie and Freddie a blank check for federal support by removing a $400 billion cap on aid to the lenders, Republicans denounced the move and demanded that the administration scale back the support, not increase it. However, pulling the plug on federal support is viewed by many as too risky, so today Geithner called for both parties to come together to find a realistic solution. “The failures that produced the crisis, that produced the system we have today were bipartisan,” he said. “The solution must be as well. This is a test for Washington. The stakes are very high. For many Americans, their home is their largest financial asset and the housing industry supports millions of jobs.” The day-long Treasury conference gave numerous executives and experts the chance to weigh in on how the reform process should unfold. Many of today’s panelists said the government should still back mortgages even while Fannie and Freddie are returned to private ownership or wound down altogether. “Without government guarantees mortgage rates would be hundreds of basis points higher, resulting in a moribund housing market for years," said Bill Gross from investment fund giant PIMCO. "One of the key commonalities is that the government will have to continue to play a very significant role going forward, that there's just no way around that certainly for the foreseeable future. That our housing market, our mortgage market, and the broader economy are just too fragile," said Mark Zandi, chief economist at Moody’s. "And it's going to require that the government remains intimately involved in these markets for a long time to come." But for all of today’s talk, no action is expected for months – the administration has set a January 2011 deadline for delivering its eventual proposal to Congress.

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