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On the Future of Fannie and Freddie

Today, I’ll be covering a Treasury Department conference on the future of Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide liquidity to the mortgage market and have required $150 billion in a taxpayer bailout so far.

Reform will prove difficult and will happen slowly because Fannie and Freddie control or backstop so much of the housing market. The two entities guarantee about three-quarters of mortgage-backed bonds — and the government backstops all but just 3 percent of mortgages. Reform them too quickly, and risk cratering the nascent, if extant, housing recovery. “It’s like building an airplane while you’re still flying it,” said David Ledford of the National Association of Home Builders told Bloomberg.

But politicians are eager to make clear they have every intention of returning housing risk to the private market. In his opening remarks, via Politico, Treasury Secretary Timothy Geithner says:

“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country. … We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support.

“We will not support a return to the system where private gains are subsidized by taxpayer losses. We need to delineate more clearly the public policy goals of how best to promote reasonably priced and stable mortgage costs for most Americans from how best to provide access to affordable housing for lower income Americans. […] The failures that produced the system we have today were bi-partisan. The solution must be as well. This is a test for Washington. The stakes are high. The housing industry supports millions of jobs. For many Americans, their home is their largest financial asset.”

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