Lawmakers Propose Replacing Fannie and Freddie With Government-run Utility
Per a Bloomberg article by Lorraine Woellert, bipartisan legislation will be introduced today in the House of Representatives that would replace Fannie Mae and Freddie Mac with a government-run entity.
The legislation will be proposed by Gary Miller (R-CA) and Carolyn McCarthy (D-NY). The Miller-McCarthy proposal would create a federal entity that would buy mortgages which would then be securitized. The securities would be backstopped by the government. This is in many ways what Fannie and Freddie are now, except there would be an explicit guarantee of the mortgages and the new entity would be explicitly run by the government.
Fannie Mae and Freddie Mac were seized by the government in 2008 and put into conservatorship in order to prevent their bankruptcy. Since that time they have drawn $160 billion worth of funds from the Treasury (close to $30 billion of which was subsequently paid back).
This new proposal is interesting because it flies in the face of the idea of reducing the role of the government in housing finance. Unsurprisingly, the new legislation is backed by several housing industry lobbying groups, including the National Association of Realtors and the National Association of Homebuilders.
Legislation that was introduced in the spring by Representatives Gary Peters and John Campbell in the spring would wind down the GSEs within five years and replace them with private associations that would be privately capitalized. Under this plan, the mortgages would still be backed with an explicit guarantee. There would be strict safeguards and capital requirements that would protect taxpayers from these private entities taking undue risks.
Back in February, the Obama Administration also floated several proposals to wind down Fannie and Freddie and replace them with a different housing finance system that would support the mortgage market during crises. A separate entity would provide an explicit government guarantee for securities created by private companies.
While reducing the government’s role in housing finance was a popular theme during the elections, it is probably not realistic or practical anytime in the near future. Presently, the GSEs (and the FHA) are keeping the housing market afloat. More than 90 percent of mortgage originated over the past three years or so are either owned, backed, or insured by the government.
It is unclear what chance any of these proposals have to become law.