Fannie Mae and Freddie Mac Reform Seeked By House GOP

Is it time to phase out Fannie Mae and Freddie Mac?

Republicans in the House of Representatives are calling for a significantly reduced role and the eventual phasing out of the country’s two largest and government controlled mortgage finance companies, Fannie Mae and Freddie Mac. In a recently released ‘Set of Principles,’ the lawmakers are calling for dramatic reform of the government sponsored enterprises (GSE) and are hoping that the mortgage giants will soon reduce their portfolio holdings by 25 percent a year for the next four years. The ultimate goal of the Republican principles is the reestablishment of a housing market in which private capital is the primary source of mortgage financing.

In September 2008, the Federal Housing Finance Administration (FHFA) placed both Fannie Mae and Freddie Mac in conservatorship in efforts to quell the ongoing credit crisis. According to the House Financial Services Committee chairman Barney Frank, the mortgage finance firms need dramatic restructuring because the partially public, partially private current “hybrid” model is not workable, as he explains “They [Fannie Mae and Freddie Mac] were private shareholder corporations with a need to make a profit but they were also given this public mandate.” As a result of government involvement (to date, the federal government has purchased more than $127 billion in preferred stock in the two companies and has guaranteed $1.7 trillion of their debt and over $5 trillion in mortgages they have purchased), United States tax payers now own at least 80% of the two companies, meaning that they are the ones at risk to bear the burdens in any struggles and losses experienced by the companies.

Last week, Federal Reserve Chairman Ben Bernanke urged Congress for new ways of financing homes, as he said “My assumption is that sometime soon that the Congress will reform Fannie and Freddie, perhaps break them up, perhaps make them officially government.” Additionally, U.S. Treasury Secretary Timothy Geithner recently told lawmakers “fundamental reform” of the government’s role in the housing finance market is needed but that it will take more than a year for the Obama administration to prepare any proposals for Congress. Geither will testify this Tuesday, March 23 at a hearing of the House Financial Services Committee, and is expected to provide some insight on how the role of Fannie Mae and Freddie Mac should and will eventually change.

Be sure to check out my follow-up piece tomorrow after the conference for a break-down of details. In the meantime, we would love to read your thoughts on the current role of Fannie Mae and Freddie Mac. What reforms (if any) would you like to see? View low current FHA Mortgage Rates and Join the discussion below.