Thursday, March 11, 2010

"Politics, shaky economy create no rush to restructure Fannie and Freddie" (FNM; FRE)

UPDATE: "Fannie and Freddie’s Future: What Will Barney Frank Do?" (FNM; FRE)"
Original post:
From the Washington Post:
The federal government has spent the past half year seeking to roll back its emergency efforts at propping up the financial markets -- with the notable exception of its involvement in mortgage giants Fannie Mae and Freddie Mac.

As the government has pledged more and more money to cover the companies' losses, it has assured the public that planning was underway for overhauling the firms so the bailouts would end. As recently as December, the Obama administration said it expected to release a preliminary report on how to remake Fannie Mae and Freddie Mac around Feb. 1.

But no plan was produced, and in response to questions from lawmakers, Treasury Secretary Timothy F. Geithner clarified last month that it would be another year before the government proposes how to restructure the firms.

Sixteen months after they were seized to prevent their collapse, the companies remain wards of the state, running a tab that has now exceeded $125 billion in what has become the single costliest component of the federal bailout for the financial system.

Some members of Congress have complained that the huge public commitment is unsustainable. But the administration has been reluctant to start reforming Fannie Mae and Freddie Mac, officials and analysts say, because the firms in their current form play an essential role in supporting the housing market at a time when it is still under severe stress. As other financial firms have exited the market and credit has seized up, Fannie and Freddie have been behind the vast majority of mortgages made since the start of the financial crisis. The companies now own or back more than half of all U.S. home loans.

Moreover, the companies are helping the administration pursue policies designed to make new homes more affordable, ease the burden on struggling borrowers and direct funding to parts of the country especially hard hit by the downturn. Any initiative to remake the firms could distract energy from these programs or, in some cases, put an end to them.

The political angle

Nor is the administration eager to foster a debate over Fannie Mae and Freddie Mac in an election year, according to analysts and lawmakers. The pair have long been lightning rods for criticism by many Republicans, who call them an intrusion into the free market and a Democratic patronage haven. Many Democrats, even as they faulted companies' excesses, have defended the firms' role in fostering home ownership.

And with Obama's campaign to overhaul financial regulation facing resistance on Capitol Hill, administration officials don't want to add another divisive issue to the mix.

"We've obviously had our hands full, as has the Congress," said Michael Barr, assistant Treasury secretary for financial institutions. "We're just beginning to see some positive signs in the housing market, but we're not out of the woods yet and so we want to be careful to be sure that we had an appropriate, paced process."

Barr said Treasury officials have been meeting informally with their counterparts at the White House and the Department of Housing and Urban Development and exchanging policy papers to develop principles for overhauling Fannie Mae and Freddie Mac. These principles include, for instance, that the government ensure borrowers could still get mortgages even when the private market is no longer offering loans....MORE
HT: Dean Baker who writes:

In a discussion of the future of Fannie Mae and Freddie Mac the Washington Post noted that the government had committed $125 billion to cover their losses. While the article reports that these losses have been a major political issue, it would have been useful to point out that the losses were, in effect, subsidies to banks.

Fannie Mae and Freddie Mac buy mortgages in the secondary market. If they lose money it means that they paid banks more for these mortgages than they were worth. This overpayment is effectively a subsidy to banks who otherwise would have been left holding the mortgages on their books and likely would have incurred losses when they went bad.