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We've Nationalized the Home Mortgage Market. Now What?

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The home loan market was nationalized in a slapdash fashion and is now riven by conflicts of interest and competing goals. To solve it, a consensus is forming to head down the path of the least resistance but greatest risk.

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Under conservatorship, Congress has been tempted to milk the companies. Loathe to raise taxes and eager to cut them, Congress has used Fannie and Freddie as a private kitty, raiding them for cash. In 2011, Congress siphoned off 10 years' worth of part of Fannie and Freddie's guarantee fees to fund a mere two months of a cut in the payroll tax. Recently, the House passed an immigration bill that is funded by their guarantee fees.

"It's a sign of weakness for this country if we can't make hard decisions without using the GSEs" 2014 Washington-speak for Freddie and Fannie 2014 "as piggy banks," says Dave Stevens, the head of the Mortgage Bankers Association and former official in the Obama administration.

The companies are regulated by the Federal Housing Finance Agency, which clears all their major business decisions. That has added to the muddle: The FHFA's acting director Edward DeMarco controversially has interpreted its main goal as preserving the assets of Fannie and Freddie and de-emphasized its mission to "support housing finance and affordable housing, and support a stable and liquid mortgage market," as it puts it on its website. Earlier this year, the FHFA decided against forgiving principal on delinquent mortgages, arguing that the benefits were too small and the risks unknown. The decision drew a rebuke from Treasury Secretary Timothy Geithner.

The longer Fannie and Freddie stay in purgatory, the more likely they are to suffer from key departures of executives, who are frustrated that they cannot make their businesses' key decisions. The worry is that important areas of their businesses erode, such as their risk management, raising the possibility of sudden, large losses for taxpayers.

Few Democrats, Republicans, housing advocates and economists want to preserve the current situation. Yet while there are dozens of congressional bills, think-tank plans and an Obama administration white paper with proposals to resolve the mortgage giants, there has been little change.

During its second term, the Obama administration has vowed to overhaul how Americans buy their homes 2014 and the central problem is what to do about Fannie and Freddie. Wind them down? Return them to private company status? What role should the government play in the mortgage market, and how big?

Political Machinations Lead to Paralysis

Conservatorship wasn't supposed to last four years. Hank Paulson, Bush's Treasury secretary, took the emergency measure in September 2008, right before Lehman Brothers collapsed. Internally, the administration considered it a short-term solution. In the midst of a much-worse crisis hitting the entire financial system, however, it did not plan an exit.

The Obama administration spent the bulk of 2009 stabilizing the financial system in the aftermath of the panic. Then it confronted the housing crisis, though it has received consistent and bipartisan criticism for its ineffective programs.

The pace of discussions about resolving Fannie and Freddie picked up in 2010. Even though the private sector mortgage market had just failed disastrously in 2008, the most influential voices in the Obama administration's first term advocated returning to a limited government role.

At a meeting in December 2009 with progressives who were pushing for a more active administration role in the housing crisis, Larry Summers, then the director of the National Economic Council, challenged them. "He would ask why housing is different from anything else 2014 than widgets," recalls Andrew Jakabovics, a housing specialist who worked at HUD after having been at the Center for American Progress, a Democratic think tank in Washington that played an active role in advising the administration on housing policy.

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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