Thursday, September 18, 2008

Fannie and Freddie's Open-Ended Future

Fannie and Freddies Open-Ended Future

Treasury Secretary Henry Paulson's surprisingly aggressive move to essentially nationalize (if only temporarily) struggling mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) has been well received overall. But big questions remain as to how the two entities should be restructured once the immediate solvency crisis is past.

That decision ultimately will be made by a new Administration and Congress, but the battle lines are being drawn. Critics have long argued that Fannie and Freddie were doomed by their hybrid nature: They were expected to achieve public goals such as affordable housing while earning rich profits for shareholders. While both of the Presidential candidates pronounced themselves in support of the emergency bailout, the two men have very different views of the long-term role the mortgage companies will play. Republican contender John McCain was quick to argue that they should be downsized and privatized once they return to health. His rival, Democrat Barack Obama, has stressed that the government must move carefully to ensure that any changes won't cause further disruption to the housing and financial markets. Here's a look at options being discussed in policy and financial circles, and what each would mean.


BACKERS: Republican Presidential nominee John McCain and other conservatives. Former Federal Reserve Chairman Alan Greenspan.

BASICS: This camp believes that Fannie and Freddie should be shrunk down and recapitalized through a combination of asset sales and an infusion of federal funds. Then the entities should be broken up and sold off.

DETAILS: The privatized lenders would be profit-driven, answer only to shareholders, and keep the right to buy mortgage-backed securities for their own portfolios.


BACKERS: Representative Barney Frank (D-Mass.) and senators Charles Schumer (D-N.Y.) and Christopher Dodd (D-Conn.)

BASICS: This group wants to see Fannie and Freddie's public and private functions more clearly delineated. The two would be downsized but would likely remain publicly traded. Some in Treasury point to public utilities as a model.

DETAILS: Shareholder returns could be capped, and each lender's freedom to develop new products or invest for its own portfolio would be limited.


BACKERS: There are no prominent supporters of this option, but most acknowledge that it's too soon to write it off.

BASICS: Under this scenario, Fannie and Freddie would officially become government agencies focused solely on their public mission of providing liquidity to the housing market and promoting home ownership for low-income Americans.

DETAILS: Fannie and Freddie would no longer have shareholders to satisfy. Also, they would not be permitted to invest in mortgage-backed securities.

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