Obama Administration Calls For “Fundamental Change” To Fannie Mae and Freddie Mac

Author's conception of how Fannie Freddie reform will be written. The blurst of times indeed.

Today is the beginning of the Conference on the Future of Housing Finance, which is essentially a round-table where a variety of opinion-makers in the housing industry will discuss what should or should not be done with giant mortgage lenders Fannie Mae and Freddie Mac in broad platitudes without making any specific suggestions about what is actually feasible and plausible.

First up, U.S. Treasury Secretary Timothy Geithner, who said “It is not tenable to leave in place the system we have today”.  He continued “we will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support.  We will not support a return to the system where private gains are subsidized by taxpayer losses”.  This attitude evidently does not apply to many Wall Street firms that Geithner was instrumental in bailing out as head of the New York Fed.

In case you have forgotten or have been living under a rock, Fannie Mae and Freddie Mac were seized by the government in 2008 and put in a conservatorship in order to prevent their insolvency.  Since that time, the government has pledged an unlimited amount of capital (the money you and I pay in taxes) to back Fannie and Freddie.  So far we have poured $150 billion into the government sponsored entities.  The Congressional Budgetary Office estimates that the total bailout cost will be approximately $400 billion, although others have said the cost could be closer to $1 trillion.

Read that again: there could be $1 trillion worth of bad loans that were effectively dumped on U.S. taxpayers by banks.

There appears to be no specific plan as to what should be done with Fannie and Freddie.  A plan from the administration is supposed to be made available sometime in January (conveniently after the November mid-term elections).  Reform of the GSEs was conspicuously absent from the Dodd-Frank financial reform bill.  Everybody seems to agree in theory that something needs to be done, but nobody knows what that is.  In fairness, this is an extraordinarily difficult issue, complicated by the fact that there are few, if any, private investors that would be willing or able to step into the role that the GSEs fill.

I expect the fight over Fannie and Freddie to be a bitter partisan slug-fest, long on political grand-standing and short on logical analysis and cogent points.  I believe there should be a real national debate on whether or not the government should be subsidizing housing at all.  Lack of government support for housing would likely reduce homeownership levels, but that may not be a bad thing.

Broadly speaking (since there are no specifics here), what do you think should be done with Fannie and Freddie?  Should the government be involved in housing subsidies at all?  Share your opinion in the comments section below.