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The Washington Independent
The Washington Independent

Why FinReg Does Not Handle Fannie and Freddie

Over at the excellent Atlantic Business Channel, Daniel Indiviglio runs through the three major overlooked issues in Sen. Chris Dodd’s (D-Conn.) financial

Tom Mohamed
Last updated: Jul 31, 2020 | May 03, 2010

Over at the excellent Atlantic Business Channel, Daniel Indiviglio runs through the three major overlooked issues in Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill that economists and market-watchers flagged for The New York Times. The folks quoted cite credit runs in the shadow-banking sector (in English: old-fashioned bank runs in the new-fangled trillion-dollar “repo” market, where financial firms provide short-term loans to one another) and firm capital and reserve requirements as “huge problems.” I agree there — but not with the third issue: the absence of policies to deal with Fannie Mae and Freddie Mac.

Indiviglio writes:

One big problem: the government-sponsored mortgage entities, which essentially everyone agrees paid a major role in the financial crisis. They have been the recipient of a still growing $200 billion bailout.

One [New York Times] source agrees: “Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation. ‘It’s outrageous,’ he finally said.”

This is also a Republican complaint. Fannie and Freddie played a huge role in helping to overheat the U.S. mortgage market. Until those agencies experience some fundamental change in policy and procedures, it’s hard to see how another housing disaster won’t occur again in the future. There’s no attempt at any reform for these companies in either of Congress’ financial regulation proposals.

But I’d push back hard on the notion that the bill “ignores” Fannie and Freddie, the government-sponsored enterprises now backing 90 percent of mortgages. The bill chooses not to handle them, for a number of reasons.

One, the financial regulatory reform bill focuses on re-regulating Wall Street, not changing Washington — on bolstering oversight and regulation of private businesses to ensure that they do not endanger the economy, rather than altering the government’s complicated relationship with housing finance.

A second and related point: The Fannie and Freddie bill might not be as big as financial regulatory reform. But it will be a big and complicated bill. Why roll all of the politicking over the trillion-dollar question of whether to shut Fannie and Freddie down — or whether the government should be in the business of subsidizing mortgages and backstopping the U.S. housing market at all — in with the question of, say, whether Goldman should keep more cash on hand? Why hold up the Dodd bill while Washington figures out how it wants to handle mortgage finance? Why let two potentially controversial bills hurt one another’s chances? Moreover, why group what might be an expensive housing bill in with the slightly deficit-reducing financial regulatory reform bill?

A third point: Washington was ready for the Dodd bill 18 months after the financial crisis. Consensus — whether good or not — had formed around the Dodd proposals. Washington is decidedly not ready for the housing bill — there are no proposals yet, and many on the Hill do not even know the parameters of what Congress might hope to accomplish. (Republicans should stop complaining about this. Their financial regulatory proposal hardly offered a disquisition on Fannie and Freddie. More like a sneeze.)

Finally, the Obama administration has buoyed the housing market this year, engaging in policies to keep fewer people underwater and to soften housing losses for banks. The Fannie and Freddie bill will likely change the housing market, for better or worse — the administration would not want to tackle how to do that now.

Tom Mohamed | I understand and respect the confidence my clients put in me as a Colorado native and seasoned real estate professional, and I strive to meet their standards every day. For over 11 years, I have been a top producer. Prior to joining the real estate industry, I served in the US Army Infantry, including several tours in Iraq and Kuwait. These experiences taught me the discipline needed to create Colorado's most powerful real estate team.


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