Privatize Fannie and Freddie? Easier Said Than Done (FNM; FRE)

Some more insight into the fate of the former GSE's from the Wall Street Journal's Developments blog:

Privatizing Fannie Mae and Freddie Mac is much easier said than done, says a new report on the future of the mortgage-finance giants from Standard & Poor’s.

The S&P report also predicts that any full-scale overhaul of Fannie and Freddie is still a long ways off because home prices and unemployment need to stabilize so that the market and the government, which effectively owns Fannie and Freddie, can assess the full scale of damages incurred by the housing bust.

Longtime critics of Fannie and Freddie, including some congressional Republicans, have increasingly argued that the U.S. should shrink Fannie and Freddie and, once the housing crisis has abated, privatize the companies. That would do away with the previous structure, where investors long believed that the government would back the debt of the two companies, creating a fuzzy, “implied” guarantee that allowed the companies to borrow money more cheaply. (Others argue for nationalization.)

But S&P analysts Vandana Sharma and Daniel Teclaw say such privatization remains an implausible scenario. “It’s hard for us to imagine how the $11 trillion U.S. residential mortgage market could attract enough private capital to replace the GSEs historical share (43% at the end of 2007, and an even higher 51% as of Sept. 30, 2009),” they write. The authors argue that because the purely private sector entities wouldn’t benefit from a lower-cost funding structure without any government backstop, mortgage rates for 30-year fixed-rate mortgages would become “too expensive for many originators.”>>>MORE