From Breakingviews via the New York Times:
Fannie Mae and Freddie Mac shouldn’t be allowed to languish in Uncle Sam’s arms. But as the anniversary of their seizure by the government approaches, the mortgage financing giants remain the biggest black holes in the financial firmament.
Lawmakers seem content to allow the two companies, whose combined value of holdings and guaranteed securities is $5.4 trillion, to slowly expand. That’s a shame because forcing them to wind down their portfolios of mortgage-backed securities would be a good first step toward eventually deflating them.
The Obama administration won’t release its recommendations for what to do with the companies until February. This gives it time to wage battles in areas ranging from climate change to health care. These issues are already drawing heavily on the president’s political capital.
That may leave little appetite to tackle the problems at the two companies, which are government sponsored enterprises, or publicly traded entities created by the government. The firms have the popular support of some lawmakers and play an increasingly dominant role in the mortgage market. The United States has already committed up to $400 billion to cover the firms’ losses, providing enough of a cushion to tempt politicians to let the issue slide.
The problem arises from the companies’ dual roles. They have a public policy mandate to increase lending to the housing market. And they are supposed to reward shareholders. The conflict between these two goals caused the companies to nearly collapse.
Fannie Mae and Freddie Mac’s principal business of guaranteeing mortgages caused economic distortions that helped drive the housing boom. As private mortgage lenders pulled in their horns, the two companies’ share of the market grew from under 50 percent to around 80 percent by the end of last year, despite the fact that their aggregate portfolios have only increased by about 3 percent since their conservatorship.
Their success is the sticking point. Society benefits from the efficiency and lower costs derived from the standardization of mortgage pools, which allows them to be easily securitized. The government sponsored enterprises scale this advantage up significantly. Fannie alone has $2.8 trillion of guarantees on mortgage-backed securities....MORE