GSEs (Fannie/Freddie),FHA&HUD

GSE Future?

Posted on Monday, December 27, 2010

Obama administration officials are struggling to reach consensus on a future path for mortgage giants Fannie Mae and Freddie Mac, unable to agree on whether the government should provide a guarantee for new mortgages when the market stabilizes, according to people familiar with the discussions.
The matter is becoming urgent because of a looming January deadline for the Treasury Department to produce recommendations to Congress for revamping the nation's system of housing finance.
Top administration officials, including Treasury Secretary Timothy Geithner, have publicly discussed the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages. Investors, academics and the housing industry say such a guarantee is needed to maintain a healthy market, particularly for long-term, fixed-rate loans that remain a keystone of U.S. housing.
But the administration is divided over whether a backstop for new loans would be needed when markets return to normal, a process that could take several years. Some worry any guarantees expose the government to too much risk, as the $134 billion in losses incurred by Fannie and Freddie indicate.
Edward DeMarco, the acting director of the federal agency that regulates Fannie and Freddie, echoed those concerns at a fall hearing. "The negatives [of an explicit guarantee] have not been fully explored," he said, adding that taxpayers could be on the hook again if the government underpriced any guarantee. Also, in exchange for backstopping loans, the government "would likely want a say" in who should get loans and at what price, Mr. DeMarco said.
Those in favor of a guarantee say it is needed to keep markets functioning during periods of stress. Others argue that because investors might assume the government will step in during a crisis, it's better to make guarantees explicit and then charge appropriately for them.
The administration remains particularly sensitive about putting forward plans that might destabilize the mortgage market, which remains on government life support. It has committed unlimited aid to ensure the solvency of Fannie and Freddie, which guarantee half of the $10.6 trillion in U.S. home loans outstanding, and together with federal agencies enable more than nine in 10 new loans.
Fannie and Freddie bundle mortgages into securities that are sold to investors, and they make investors whole when loans default. Investors long assumed that the government would rescue Fannie and Freddie if they ran into trouble.
Democrats and Republicans have fought for years about the role of Fannie and Freddie in the housing market, and Republicans are likely to challenge any White House proposal that doesn't aim to wind down the companies quickly. The fragility of the housing market could complicate efforts to pursue major changes. Analysts expect any overhaul of the country's housing-finance system to take several years.
At a minimum, the administration's proposal will likely focus on taking steps to attract private capital to return to the market, according to people familiar with the discussions. The government could do that by gradually allowing Fannie and Freddie to raise the guarantee fees they charge banks when they purchase loans.
That would make private loans relatively more attractive, though it could also drive more business to the Federal Housing Administration. It would also be politically unpopular because it would raise borrowing costs.
On Thursday, Fannie Mae said it would raise certain risk-based fees to lenders in April, following a similar announcement last month by Freddie Mac.
In an October letter to Mr. DeMarco, a bipartisan group of 37 members of Congress expressed concern that higher loan fees being charged by Fannie and Freddie were "prohibitively raising the cost of conventional mortgages."
Officials could also push to reduce the maximum loan limits for mortgages Fannie and Freddie can purchase. Those limits were expanded as an emergency measure in 2008. A report published Wednesday by the Congressional Budget Office noted that "restoring lower loan limits could encourage" the revival of the dormant private market for securitization.
Some members of Congress from high-cost housing markets in California, New York and Massachusetts have objected to reducing loan limits. They say it would put pressure on home prices. Limits are set at $417,000 nationally but rise as high as $729,750 in high-cost areas.
The housing industry and mortgage investors say an administration road map, even one they don't necessarily like, will create certainty that paves the way for private investors to return to the mortgage market.
Fannie and Freddie executives say it will also make it easier to retain staff. "If we don't have as much specificity, we have a greater challenge," said Charles E. Haldeman Jr., Freddie's chief executive, at a fall industry conference.

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