Rep. Frank Calls for Fannie, Freddie to be Eliminated

By:
Peter King | January 25, 2010

Fannie Mae and Freddie Mac, the giant lenders that support the majority of the U.S. mortgage market, should be abolished and replaced with a new system to back mortgage lending, according to U.S. Rep. Barney Frank, chair of the House Financial Services Committee.

“I believe this committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” Rep. Frank said, at a hearing of the committee on Friday.
 
The two secondary lenders have been propped up with $112 billion in federal government support after suffered steep losses on mortgage loans they had insured. Both were taken over by the federal government in Sept. 2008 to prevent their financial collapse. The Obama administration has promised to cover any losses the two government-supported enterprises (GSEs) incur through 2012, lifting a previous limit of $400 billion.
 
The two companies play a key role in stabilizing the U.S. mortgage market by purchasing mortgages issued by lenders and then reselling them to investors as securities with guaranteed rates of return. In so doing, they provide fresh capital for mortgage lenders to make new loans and give investors confidence to invest in the U.S. mortgage market.
 
Frank did not offer any specifics on what sort of system or entity might replace the two lenders. Any House legislation for reforming the two would likely be initiated in the Financial Services Committee.
 
The future of the two lenders has become a growing topic of debate in the wake of their takeover by the government and the implosion of the mortgage and housing markets. Some have urged that they be fully incorporated into the government as federal entities, while Republicans have called for them to be downsized and turned into private entities. Ironically, both were originally created as federal entities but were later turned into private corporations operating under government supervision.
 
Some economists have said it is unlikely the two could be fully privatized, noting the difficulty of attracting enough investors to support their estimated $5 trillion lending portfolio.

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