Editorial: Time to wind down Fannie Mae and Freddie Mac
03:22 PM CDT on Friday, July 23, 2010
President Barack Obama signed new reforms into law last week that should rein in some of Wall Street's most wanton behavior – well, at least until bright financial minds devise new loopholes. But Congress can't consider this work complete until it tackles two more looming threats to another economy-rattling mortgage meltdown.
Options to reform Fannie and Freddie
• Create new quasi-governmental corporations that would compete with each other.
• Sell off assets to other mortgage firms.
• Privatize them but maintain some government guarantees.
• Restructure them into public utilities; government would regulate profits, set fees and guarantee their assets.
Those would be Fannie Mae and Freddie Mac, the two part-government, part-private lenders that were more than bit players in the crisis. The new law left Fannie and Freddie untouched, even though they racked up huge losses during the housing crash, ultimately requiring massive taxpayer bailouts and a government takeover. At $160 billion and rising, these costs could prove to be the largest hits to taxpayers resulting from the crisis.
If lawmakers are serious about lessening the risks of behemoth institutions tearing apart the economy, Congress should pursue breaking up Fannie and Freddie. Together, they own or guarantee slightly more than half of the nation's $10.7 trillion in residential mortgages, a stunning concentration of financial leverage in the fists of two firms. If there is an embodiment of "too big to fail," this is it.
While not the sole cause for the mortgage crisis, Fannie and Freddie certainly stoked the collapse. They had long ago evolved from the modest backer of loans that met high underwriting standards into full-scale casino players in high-risk mortgages. By purchasing or backing the loans of mortgage companies and banks, Fannie and Freddie made it possible for lenders to create more money for new loans to new homeowners.
But Fannie and Freddie also conveniently benefited from their hybrid status: They could make loans at advantageous rates and run to Washington at the first sign of trouble. As a major political donor, they seldom heard the word "no" anywhere inside the Beltway.
The ethically challenged Rep. Barney Frank, D-Mass., has promised to take on the reform of Freddie and Fannie this fall. Congress should take steps to auction off some – if not all – of Fannie and Freddie's massive loan portfolios, which aren't reflected in the federal budget despite huge government support. To allow these organizations to operate with one foot in the private sector and the other in the government sector invites more trouble.
At the very least, Congress should take steps to assure that the threat of Freddie and Fannie to taxpayers and the economy is lessened.
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