Like many dangerous addictions, the government's reliance on Fannie Mae and Freddie Mac to make real the American dream of homeownership has turned into a hugely expensive habit that no one knows how to break.
On Tuesday, Edward DeMarco, the embattled acting director of the Federal Housing Finance Agency, which has effectively run the mortgage giants since 2008, became the latest to suggest a fix. In a letter to Congress, DeMarco outlined a strategic plan for how best to "preserve and conserve" Fannie Mae and Freddie Mac's assets on behalf of taxpayers who have already poured $180 billion into the companies to keep them from collapsing.
But the plan to wean the mortgage market and taxpayers from Fannie Mae and Freddie Mac would require Congressional approval for key parts and would require an additional government investment to build a system to package and sell mortgages independently of the companies.
Oh and the plan would also probably make home loans and home loan insurance more expensive--not ideal at a time when the housing market is still in extremely fragile shape.
The plan outlined in the letter is short on detail and unlikely in any event to get much traction in an election year. The fundamental problem, which the report acknowledges, is that Fannie and Freddie benefit from an implicit Treasury guarantee that they won't default, which is helping keep mortgage rates low. In a true market-based system interest rates for homeowners would certainly be higher--and many homeowners likely wouldn't qualify at all.
Currently, Fannie Mae and Freddie Mac buy up three out of every four mortgages issued in the United States in order to keep the housing market alive. The companies then bundle up those loans, about $100 billion worth per month, and sell them to investors. The mortgage giants now propose creating a new platform to connect homeowners to the capital markets.
The proposal does not put a price tag on how much building a new platform, which currently doesn't exist, might cost, but Congress would have to allocate the money.
Another proposal would have private investors bear more of the credit risk should a loan default and also take on an enhanced roll in underwriting loan insurance for borrowers. This the issue that has bedeviled anyone who has tried to figure out what to do with the mortgage giants.
One big problem is that the companies are currently able to borrow money by issuing debt at interest rates approaching those of Treasury bonds, suggesting that the markets assume that the government will back any losses. The FHFA says it is already increasing some prices, per Congressional direction, in order to even the playing field for private investors. But a truly level field would probably be bad for prospective borrowers. And if Congress were to kill off Fannie Mae and Freddie Mac, there is no guarantee that a private market would make home loans affordable and widely available.
This is the conundrum that has kept the agencies stuck in their present zombie state for more than three years. No one wants the government to control the mortgage market, but there is little political will for the risks inherent in the alternative.
There is no mention in the report of an issue that has dogged DeMarco recently--whether or not Fannie Mae and Freddie Mac should write down loans in order to help more struggling underwater borrowers. DeMarco's refusal to write-down loans meant that the recently-announced $26 billion foreclosure settlement will help far fewer homeowners and has led government officials to call for his replacement.
Instead, DeMarco proposes a "renewed focus" on other foreclosure prevention strategies, such as short sales, where banks agree to accept less than they are owed--but don't keep borrowers in their homes--and programs that allow indebted homeowners to turn over their leases but then stay in their homes by paying rent.
The letter also notes the depressing financial fact that whatever is done to finally resolve the companies, there is no good-news auto bailout story to be told here. [Fannie and Freddie's] losses are of such magnitude that the companies cannot repay taxpayers in any foreseeable scenario," DeMarco writes.