Many Successors to Fannie, Freddie?

By:
Kara Johnson | May 13, 2011

Fannie Mae and Freddie Mac would be replaced by an array of smaller agencies under bipartisan legislation being proposed by two House lawmakers, the Wall Street Journal is reporting.

The new agencies, which would be privately owned but would operate like public utilities, would perform the same major functions as the two mega-lenders in backing residential mortgages. However, they would be required to maintain larger capital reserves than Fannie or Freddie and would probably not be publicly traded, according to the report.
 
The legislation is reportedly to be introduced today by Rep. John Campbell (R-Calif.) and Rep. Gary Peters (D-Mich.). Neither has made an official announcement about the legislation, although Rep. Campbell has linked to the Wall Street Journal article on his congressional web site. As a bipartisan measure, it offers a potential compromise between Democrats and Republicans on the future direction of the U.S. mortgage market.
 

Would guarantee loans

 
The new agencies, of which there would be five or more, would act to boost mortgage lending and keep home loans affordable by supporting a secondary market for mortgages. Much like Fannie Mae and Freddie Mac, they would buy mortgages made by lenders and repackage them as guaranteed mortgage securities for investors.
 
Though privately owned, the agencies would operate under the supervision and authority of the Federal Housing Finance Agency, which presently oversees Fannie Mae and Freddie Mac.
 
Unlike Fannie Mae and Freddie Mac, the securities would come with an explicit, rather than implied, government guarantee for mortgages that meet certain underwriting standards. Those standards would be stricter than those required by Fannie and Freddie, however, and the government guarantee would apply only to the securities and not to propping up the agencies themselves in the event of failure.
 

Debate over government role in mortgage market

 
The question of what to do about Fannie Mae and Freddie Mac, who together guarantee the majority of U.S. residential mortgages, is one of the more contentious ones facing Congress as it debates the future of the nation’s housing market. The two lenders left taxpayers on the hook for at least $130 billion in bad mortgages following the collapse of the subprime mortgage market, virtually guaranteeing that major changes would be made.
 
Economic conservatives, including many Republicans, often blame the two lenders for distorting the housing market and helping to give rise to the housing bubble. They would prefer to see the government play little or no role in facilitating mortgage lending, arguing that such a role is best left to private markets.
 
Progressives, including most Democrats, argue that the government, acting through Fannie and Freddie, has played a key role in facilitating mortgage lending since the Great Depression. They contend that some level of government support is needed for consumers to be able to continue to obtain the mortgage products they are accustomed to, such as 30-year fixed-rate mortgages with no prepayment penalty, and to keep homeownership attainable for the broad middle class.
 
Many in the mortgage and housing industry have also called for a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

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