By enlisting Fannie Mae (FNM) and Freddie Mac (FRE) in its
dramatic fight against the foreclosure crisis, the Obama
administration is boosting the importance of the two troubled
mortgage entities while also increasing the risk that the firms
will continue to lose money.
The move, announced as part of a broad package of housing,
mortgage and foreclosure proposals, is winning the applause of some
experts while others remain concerned about the long-term impact on
the mortgage finance giants.
Under the plan the administration unveiled Wednesday, Fannie Mae
and Freddie Mac would refinance loans in effort to make mortgages
more affordable for as many as 4 million to 5 million homeowners
who are unable to refinance because of plummeting home prices. The
centerpiece initiative would be limited to borrowers who took out a
conforming loan owned or guaranteed by one of the two
government-sponsored enterprises and would allow them to refinance
even if they owe more than 80% on the value of their home.
At the same time, the Treasury Department agreed to boost its
funding commitment to Fannie and Freddie - which were seized by the
government in September amid concerns they would collapse from
mounting mortgage defaults - to $200 billion each from the original
level of $100 billion each.
"Fannie Mae and Freddie Mac are critical to the functioning of
the housing finance system in this country and play a key role in
making mortgage rates affordable and maintaining the stability and
liquidity of our mortgage market," Treasury Secretary Timothy
Geithner said in a statement Wednesday morning.
New America Foundation Financial Services Policy Director and
former Clinton administration economic policy official Ellen
Seidman said the administration is right to lean on Fannie and
Freddie to ease the pain in the housing markets.
"I think it's exactly the right thing to do," she said in a
phone interview. "You now have these two pretty well-oiled
machines. We've essentially nationalized them, so let's use
them."
Seidman, who also serves as a top executive for Chicago-based
community development bank ShoreBank Corp., added that the
homeownership plan would go a long way to help ShoreBank boost
lending to homebuyers.
Still, some experts point out that the mortgage market has
already dealt a blow to Fannie and Freddie. They worry that the
firms' new refinancing role will only lead to substantially more
losses for the government-sponsored enterprises, or GSEs.
"They [the GSEs] will become deeper in the hole financially as
they get further into this mortgage modification business ... but
we don't get any sense whatsoever of what happens to them," said
banking industry and monetary policy consultant Bert Ely. "It
exacerbates the longer-term question which is what is the future of
Fannie and Freddie."
Treasury's decision to boost funding to $200 billion each for
the government-sponsored firms is a move to ease investors'
concerns about the GSEs' role in the housing plan, given that GSE
debt carries only an implicit government guarantee, Ely said.
"This is the government's way of saying to the owners of Fannie
and Freddie bonds and mortgage-backed securities: 'You're
protected. We're going to put some money in, therefore, you don't
have to worry about getting repaid,'" Ely said.
Still, Ely said the more Fannie and Freddie get drawn into the
shaky mortgage market, the harder it is going to be for
policymakers to address issues about the firms' fate. Once the GSEs
were placed under government control, policymakers began debating
what form the firms should take to resolve conflicts in their
hybrid structure. Former Treasury Secretary Henry Paulson, for
instance, proposed that the GSEs be recast into a public utility
model through which the companies would be replaced by one or two
private firms subject to regulation by a commission that would
limit their profitability.
FTN Financial agency debt analyst Jim Vogel also said the GSE
funding hike is a clear sign that the government understands the
markets will be sensitive to the potential cost of increased
homeownership assistance. "The administration couldn't accomplish
its housing goals while raising doubts about existing GSE
securities," he said.
Still, very few experts were surprised that the Obama
administration put the GSEs front and center in its housing plan,
partly because government officials are having to be creative when
it comes to financing rescue efforts.
"It's not surprising to me that so much of the plan revolves
around Fannie and Freddie because there's a limited amount of money
in the [Treasury's Troubled Asset Relief Program]," said Robert
Litan, a senior fellow at Brookings Institution. He applauded the
administration for employing the GSEs in an effort "to change the
rules on refinancing," but noted that his support is unlikely to be
universal.
"I know there are going to be critics," he said. "This is
basically asking Fannie and Freddie to dig a deeper grave."
However, the housing crisis is in need of a very aggressive,
targeted effort to stem foreclosures and it makes sense to use the
GSEs to make mortgages more affordable for more homeowners, Litan
said.
"Virtually every economist from the right or the left or the
middle has said you're not going to fully solve the banking problem
unless you do something about housing," he said. "You may be
causing deeper losses for Fannie and Freddie but you're saving
yourself on the other side from having to bail out the banks so
much."
Similarly, American Enterprise Institute fellow and former White
House counsel to President Ronald Reagan Peter Wallison said he
agrees with the Obama administration's decision to rely heavily on
Fannie and Freddie for its housing fix.
"Now that they have been taken over by the government, they
should be used to the maximum extent possible to address the
mortgage problem," Wallison said. "They were always the best
institutions for doing that and the fact they own so many mortgages
or control so many pools of mortgages ... it makes a tremendous
amount of sense to do that."
However, Wallison echoed Ely's comments when it comes to
questions about the impact the housing plan will have on the GSEs
over the longer-term.
"They're no longer being treated as private companies of course.
They're doing things the government wants them to do - not for
profit," Wallison said. "That's good, but it does create some
difficult problems at the end of the line when they have to deal
with shareholders. That'll be a real puzzle."
-By Maya Jackson Randall, Dow Jones Newswires; 202-862-9255;
maya.jackson-randall@dowjones.com
(Michael Crittenden and Jessica Holzer contributed to this
report.) -0-