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March 21st, 2013

No progress to resolve Fannie, Freddie mess



Capitol BuildingNearly five years after the takeover of Fannie Mae and Freddie Mac, the federal government has made little meaningful progress to bring the government’s conservatorship to an end.

That’s according to Ed DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which has oversight responsibility for the two government-sponsored mortgage corporations or “Enterprises.” DeMarco delivered his thoughts in testimony Tuesday to the U.S. House Committee on Financial Services.

How do we transition from government to private?

The crucial question, as DeMarco explained, is: “How do we move from the housing finance market of today, where almost all new single-family mortgage originations have some type of government support, to a future market far more reliant on the private provision of mortgage credit? And in particular, of the $5 trillion portion of the mortgage market currently served by the Enterprises what share, if any, should have government credit support in the future?”

DeMarco said there “seems to be relatively broad agreement” that the quasi-governmental structure of the Enterprises, in which investors provided funding for housing at preferential rates based on a perception of government support, “did not work,” given that the Enterprises had drawn $187.5 billion in funds from the U.S. Treasury as of Dec. 31, 2012.

But there’s apparently no agreement, broad or narrow, as to what sort of structure would work better, if at all.

Some say the mortgage market can’t operate without government, i.e., taxpayer guarantees. Others, including DeMarco, reject that view. Maybe.

A mortgage market without taxpayer support

“I believe it is possible to rebuild a secondary mortgage market that is deep, liquid, competitive and operates without an ongoing reliance on taxpayers or, at least, a greatly reduced reliance on taxpayers,” he said.

There are a few different options, he explained:

  1. A mostly market-oriented approach
  2. A government backstop that would step in and right the ship only as needed
  3. Government guarantees that would ensure a stable flow of mortgage credit and limit market uncertainty

“These options are not novel. They are essentially the three options that the Administration set forth in its white paper more than two years ago,” DeMarco said.

He went on to outline the pros and cons–also not new–of those approaches, then offered some final observations:

  • “The U.S. housing finance system cannot really get going again until we remove this cloud of uncertainty.”
  • “While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two government-supported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve.”

The bottom line, as DeMarco ultimately notes, is that it will, quite literally, take an act of Congress to sort out the future of the mortgage markets.

And, although DeMarco didn’t say as much, an act of Congress any time soon seems unlikely.

2 Responses to “No progress to resolve Fannie, Freddie mess”

  1. Deb Says: May 2nd, 2013 at 12:34 pm

    I would like to buy a Homepath Renovation home but my home has not sold yet. Will Fannie close using my existing home as collateral in lieu of a contingency?

  2. Tim Manni Says: May 3rd, 2013 at 9:48 am

    Hey Deb, Thanks for writing in. I don’t know the answer to this exactly, but my guess would be “no.” I don’t believe Fannie would be willing to accept collateral. I would contact your lender to determine your options. I would think Fannie wants your home sold first or proof you can financially handle both mortgage payments. Keep me posted, thanks, Tim

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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