Since the passage of the financial reform bill, the government has set its sights on reforming Fannie Mae and Freddie Mac. This is good because the bailout of Fannie and Freddie (which is actually a bailout of large banks) has cost U.S. taxpayers $145 billion so far. Some estimates place the ultimate cost of the bailout between $400 billion and $1 trillion. The Fannie and Freddie bailout will ultimately be the most costly part of the government stimulus plans.
Today David Stevens, Assistant Secretary for Housing and Urban Development as well as the Federal Housing Administration released this statement regarding reform initiatives for Fannie and Freddie. While the statement doesn’t contain any specific ideas as to how to initiate reform, I liked the overall tenor of it. Stevens said the “question is not if but when” Fannie and Freddie will be reformed. Stevens said:
“From the beginning, the Obama Administration has made clear that the current structure of the government’s role in the housing finance market is unsustainable and unacceptable. Fundamental reform is clearly needed. But winding the GSEs down abruptly is not the answer. It would destabilize an already fragile housing industry and put the loans already on the books of these institutions at even greater risk. We must proceed with great care and thought and we move to a new housing finance system – it’s just too important, with too much at stake, to rush.”
A conference is going to be held on August 17th in Washington that will begin the process of formulating a plan for reforming Fannie and Freddie. Stevens emphasized the need to “get it right” because the stake are huge – the mortgage market is the second largest securities market in the world, and Fannie and Freddie hold more than $5 trillion in mortgage guarantees and have $1.5 trillion in mortgages and securities on their books.
Finally, Stevens said that the support for Fannie and Freddie was not an endorsement of their business models, but that it was necessary because failure to do so would have had dire consequences for the economy.
How do you think Fannie and Freddie should be reformed? Let us know in the comments section below.
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sp
July 30, 2010 @ 10:22 am
Fannie and Freddie are too connected with other institutions and carry a huge systemic risk. It would be better to wait and see if these institutions can turn around their operations and become independent once again and start making profits. The government can then sell its shares. I think the two firms can remain OTC traded companies. However, I think they should definitely be smaller.
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