The Washington Post
By: Zachary A. Goldfarb
August 7, 2010
For several decades, whenever a question of housing policy came up in Washington, two companies dominated. Fannie Mae and Freddie Mac marshaled armies of lobbyists, deep political connections and millions of dollars in contributions to get their way.
But now Fannie Mae and Freddie Mac, titans of the mortgage finance industry, are wards of the state, bailed out by Washington to the tune of $160 billion and banned from political activity. As the Obama administration and Congress prepare to take up overhauling the $12 trillion U.S. mortgage market, new interests are shaping the debate like never before.
Among those influencing many Democrats are affordable housing advocates and liberal think tanks that want the government to do less to foster homeownership and more to support rental housing for low-income people. Those influencing Republicans favor sharply reducing all federal support for housing.
In the past, Fannie and Freddie found backers on both sides of the political aisle. Key Democrats in Congress and in the Clinton administration were their most ardent supporters. President George W. Bush touted an "ownership society," relying on Fannie and Freddie to help low-income people buy homes.
Officials from both parties now agree that the housing finance system is unsustainable; virtually all new home loans are guaranteed by Fannie, Freddie or the Federal Housing Administration, putting taxpayers on the line. Administration officials say they still believe in a significant government role in promoting home ownership, but one less expansive than under previous presidents. Republicans, who have introduced legislation to get rid of Fannie and Freddie altogether, might not vote for an overhaul that retains any government role in housing.
On Aug. 17, the Treasury Department is hosting a conference of financial companies, housing advocates, academics and other interested parties to begin discussing how to design a new system that doesn't rely as much on taxpayers. The Obama administration is required to make a proposal by January under the bill recently passed by Congress to reshape financial regulation.
"What I'm afraid of is that people on either side of the aisle will potentially play politics and point fingers," said Michael D. Berman, incoming chairman of the Mortgage Bankers Association. "There's some folks that are so afraid of having any government involvement at all because of the losses we've had."
But if politics does get in the way of housing reform, it would be despite a consensus emerging among housing companies and consumer advocates over what to do with Fannie and Freddie. That common ground is evident in letters filed last month with Treasury in response to a request for public comment about the future of U.S. housing policy.
Many of the groups that responded want to maintain Fannie and Freddie -- or set up several similar entities -- as heavily regulated companies that offer a guarantee to investors in high-quality mortgage loans. The federal government would stand behind that guarantee.
Under this scenario, the companies would charge mortgage originators a fee for the guarantee and use some of the money to cover mortgage investments that go bad. Part of the fee would be contributed to a separate insurance fund that would be tapped if one of the companies fails and can no longer stand behind the mortgage investments it guaranteed. Investors, the thinking goes, could remain confident in the mortgage securities and continue to buy them.
"I don't think we could possibly contemplate what it would be like to start without Fannie and Freddie in the picture," said Tom Deutsch, executive director of the American Securitization Forum, which represents many firms on Wall Street. "They can't disappear overnight."
The consensus approach would to try to fix several flaws in the original design of Fannie and Freddie that contributed to their collapse -- notably, their implicit government guarantee.
For most of their existence, the two were odd hybrids: private companies set up by Congress to achieve the public goal of making money widely available for home loans. The companies operate by taking loans made by lenders, pooling them into investments, guaranteeing them and then selling them to the market, providing a stream of money for lenders.
Neither the firms nor the government ever said explicitly that Fannie and Freddie had a federal guarantee, but it was the assumption of most investors and later turned out to be correct. And because the companies were believed to have a government guarantee, they could borrow money at lower interest rates than other private firms.
With that advantage, Fannie and Freddie grew huge and focused on enriching their shareholders and well-compensated executives. In search of profit, they began buying and insuring excessively risky loans during the past decade, and ended up needing a bailout to survive.
Even as a consensus seems to be emerging over the fate of Fannie and Freddie -- at least among those who responded to Treasury's survey -- deep and broad differences remain over housing policy.
Groups that advocate for affordable housing are urging that any new housing finance system channel more money to rental housing. The funds would come out of the profits of housing companies and charges paid by mortgage borrowers.
"If we are going to have a strong housing market, any other financial institution that is generating revenue and is somehow backed by the federal government should have to do something that results in greater public benefit," said Linda Couch, deputy director of the National Low Income Housing Coalition.
Couch added that she thinks the administration is receptive to that idea.
"The administration is not only clearly interested in preserving the affordable housing that we have but is open to other ways to expand inventory of units assisted with public dollars," she said.
But new efforts to ramp up government support for affordable housing could run into opposition from the financial industry and conservatives. Skeptics say that the government's drive in recent years to foster affordable housing prompted Fannie and Freddie, as well as banks, to make risky loans to borrowers with thin credit histories.
"Having specific affordable-housing goals imposed on that system has the ability to distort the system and have a damaging effect," said Berman of the Mortgage Bankers Association.