Reform of Fannie and Freddie Could be Delayed Until Next Year

This is what happens Larry. This is what happens Larry. This is what happens when you eliminate regulation and oversight from an industry.

As I’m sure you’ve heard, last week President Obama signed the Dodd-Frank financial reform bill.  It largely targeted mortgage originators, banking, and various wall street activities for reform, as these activities all contributed at least in part to the recession.  One thing that was conspicuously absent from the legislation was any mention of reforming Fannie Mae and Freddie Mac.

The government sponsored entities (GSEs) Freddie Mac and Fannie Mae were seized by the federal government in 2008 in order to prevent their collapse.   Since they entered government conservatorship, American taxpayers have poured almost $150 billion into the GSEs, and many estimate the total cost of the bailouts will run between $400 billion and $1 trillion.  It seems fairly obvious to me that this is a situation that needs to be addressed sooner rather than later.

However, what is obvious to me is not necessarily obvious to others, as we learn from an article on Housing Wire that reform of Freddie Mac and Fannie Mae will not take place until after the November elections.

A key quote from the article:

“GSE reform could still be a long way off and is unlikely to pose risk to GSE bondholders and senior debt ratings, according to Brian Harris, a senior vice president at Moody’s Investors Service. And Harris may not be far from the truth in his assertions. HousingWire sources inside the Congressional Republican delegation said during the process of debating the financial reform bill, leading Democrats in both houses of Congress “promised up and down the aisle,” that Congress will not address the GSEs until the beginning of 2011. Republicans tell HousingWire they will push for the debate to begin earlier.”

The article goes on to say that Congress believes it will take a long time to work out some sort of plan of action for the GSEs, and it is possible no reform will occur until after the next presidential election.  This should come as no surprise, as politicians are unlikely to take any sort of stance whatsoever that jeopardizes their chances of re-election.

I have heard a variety of proposals for reforming the mortgage giants, but there is no clear consensus as to what should be done.  On one side of the spectrum, some people believe that Fannie and Freddie should be unwound entirely, while others say they should be made into explicit government agencies with government backing.  Ultimately I suspect the reform will fall in between the two.

In any case, it will be interesting to see what ends up happening with Fannie and Freddie.  I suspect the debate will be even more acrimonious than the one that surrounded health care, and probably similarly drawn out.  I will let you know when there are further updates.