Freddie and Fannie Reform Delayed Until 2011

$145 Billion doesn't go as far as it used to.

Financial regulatory reform is a hot-button topic recently, the cause of much rancor in the Congress and amongst the public.  One big part of the debate centers around the future of mortgage behemoths Fannie Mae and Freddie Mac.

Freddie Mac and Fannie Mae, own or guarantee over $5.5 trillion dollars worth of mortgage loans, and account for more than 70 percent of single family mortgages in the United States.  The government sponsored entities (GSEs) were seized by the federal government in September 2008 in order to prevent the dissolution of the companies.  Since that time the GSEs have hemorrhaged money, needing over $145 billion in taxpayer funds to avoid insolvency.

Initially the government pledged to provide up to $400 billion in capital to save the lenders.  Recently the government altered their stance and offered unlimited funds to Fannie and Freddie.  The Congressional Budget Office estimates that losses from the GSEs will total around $370 billion by 2020.

The debate surrounding the GSEs revolves around when to end the government conservatorship of the companies, and what should fill the void left by the lenders.  Freddie and Fannie provide liquidity to the market, thereby promoting lending as well as keeping mortgage rates at manageable levels.  They are essentially a subsidy for the housing markets and encourage people to invest in homes, which is a major driver of economic growth.  Without Fannie and Freddie, home ownership would not be attainable for large segments of the population.

It appears as though any action on the mortgage juggernauts will have to wait until next year, as current regulatory reform proposals are so contentious and complicated that many in Congress and the White House would prefer to defer dealing with the GSEs next year as part of a separate bill.  It is thought there may be a better chance of building a consensus by splitting the Freddie and Fannie issues from reform of Wall Street, banking, and derivatives.

A proposal sponsored by Senator John McCain that was voted down would have set a timetable for the end of government ownership of the GSEs, and would have slowly wound down the asset sheets of the companies.  The plan offered no replacement for the GSEs.  An amendment from Senator Chris Dodd was approved, which requires the Treasury to conduct a study on Freddie and Fannie, and then suggest a plan of action by the end of 2011.  Among the options that will be considered are liquidating, privatizing, or dividing Fannie and Freddie.

What do you think we should do with Fannie and Freddie given their important role in the economy?  Let us know in the comments section below.