We have to change our approach to fixing the Federal National Mortgage Association and Federal Home Mortgage Corporation, more commonly called Fannie Mae and Freddie Mac. Collectively, they are called government sponsored enterprises, or GSEs.
The taxpayers' cost of maintaining them is prohibitive. Their mission has become muddled and there is no political will to demolish them -- at least during the struggling economy. Currently, the GSEs are under federal conservatorship and they are sucking up government subsidies by the hundreds of billions of dollars.
Historically, the government has implicitly guaranteed the GSE's loans and mortgage-backed bonds so that investors are assured against loss of principal. Everyone agrees that the subsidies and loan guaranties have to end. But there is little agreement on when and how to do it.
"It is high time that the federal government come clean about the true costs of our financial commitments -- especially for Fannie and Freddie," said Sen. Judd Gregg (R-NH), introducing a Republican sponsored, GSE amendment to end the taxpayer bailout. He adds that the cost to taxpayers is "estimated to be at least $400 billion to $500 billion." Others say it will be close to a trillion dollars if we do nothing.
Gregg joins his Senate colleagues, John McCain (R-AZ) and Richard Shelby (R-AL) in co-sponsoring the bill. But with the Democratic majority in Congress, the proposed legislation is little more than partisan rhetoric. However, it does focus on the cost and the baggage that must be removed if Congress and the Obama Administration can muck their way out of the mire.
Marry Fannie Mae and Freddie Mac to form "Fannie Mac"
A long-range, strategic plan is needed to extricate the federal government out of the mess. Merging Fannie Mae and Freddie Mac to form "Fannie Mac" is a logical step to shift responsibility to new stockholders. The plan will also return the taxpayers' subsidies to the Treasury.
Both GSEs have similar missions. Most of their programs are comparable and the merger is logical. The new Fannie Mac will trim its staff and get rid of highly paid senior and middle management who perform the same functions.
The GSEs have one-to-four family, home-lending divisions that buy loans from banking institutions. They have separate divisions to purchase multifamily loans for rental properties with five units or more. Some of the programs within each division are similar enough to be combined and further reduce the company's size
To accomplish these goals the new Fannie Mac should cease its public-purpose mandates. Examples include its affordable housing programs, low-to-moderate income multifamily programs, and any others that are not profit motivated.
Public-purpose housing policies are clearly the domain of the Federal Housing Administration. FHA is the federal agency in the Department of Housing and Urban Development. It targets low and moderate-income individuals and insures home loans, multifamily project loans, and financing for nursing homes and hospitals. It also gives grants to nonprofit organizations that help it further its public-purpose mission. The new Fannie Mac should no longer target low and moderate-income individuals since that replicates FHA's function.
Split the new Fannie Mac into three separate entities
On the path to economic independence, Congress should form a Resolution Trust Corporation type of entity to acquire the new Fannie Mac's tainted assets. The RTC-type company would dispose of bad loans and real estate acquired through foreclosure.
The original RTC was established in 1989 to mop up the assets of failed savings and loan associations. The late Bill Seidman headed it up. He was previously chairman of the Federal Deposit Insurance Corporation under President George H.W. Bush. He adroitly disposed of billions of dollars of assets and returned the proceeds to the Treasury.
The new Fannie Mac will inherit a massive one-to-four unit, home-lending division. That is where most of the tainted assets are. It will also acquire the smaller, multifamily division. Its delinquencies and defaults are more manageable.
The skills necessary to underwrite, securitize and service multifamily loans have little in common with home lending. As a result, the new Fannie Mac should spin off the multifamily division into a new company.
One company to dispose of tainted assets; another for home lending and a third to make multifamily loans is a rational approach to shrinking the GSEs and returning billions to the Treasury.
Timing
The Republican's GSE amendment calls for repealing Freddie Mac's and Fannie Mae's affordable-housing mandate, requiring the companies to shrink their mortgage portfolios, lowering their loan limits and increasing down-payments for home loans. It is unrealistic for that to happen with the GSEs in their present form and while the economic recovery is weak.
But the time is right to merge Fannie Mae and Freddie Mac and form three separate companies. That is the best way to lead the GSEs out of federal conservatorship and repay the taxpayers.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin