Many members of Congress say they want to end the shotgun marriage between the federal government and mortgage giants Fannie Mae and Freddie Mac, which was arranged in the heat of the 2008 financial crisis. But breaking up could be hard to do.
Despite much rhetoric about the urgency of ending the drain on taxpayers from covering Fannie’s and Freddie’s losses, which stand at $150 billion and could range up to $400 billion, analysts expect fears of setting off another downward spiral in the housing market to prevent Congress from getting rid of the enterprises anytime soon.
Though their star has fallen in Congress, the mortgage giants have only grown in importance to the frail housing market since the crisis. Today, they own or guarantee more than half the $10.6 trillion mortgage market. But more important, for the past three years since the private mortgage market imploded and largely disappeared, they have provided nearly all the financing and refinancing for prime mortgages in the United States.
Because of that, getting rid of them anytime soon would not be possible without causing further big disruptions in the already hard-hit housing market and possibly endangering availability of the 30-year mortgage that has been a fixture for homeowners for 80 years, housing and securities analysts say.
“Everybody agrees this type of public-private partnership just didn’t work out” and has cost taxpayers too much, said Laurie Goodman, senior managing director at Amherst Securities.
But with home sales at the lowest levels in a generation and home prices still falling, “the last thing you want to do is tamper with things in the middle of this type of a housing crisis,” she said. “If you try to pull the support in the middle of the housing crisis, you’ll get very, very restrictive credit” conditions for people seeking to buy homes.
“It appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement.” said Daniel E. Teclaw, an analyst at Standard & Poor’s Corp., noting that foreclosures continue to climb, mortgage losses are mounting and another leg down in the housing market is forecast this year.
“That will likely mean further taxpayer support for Freddie Mac and Fannie Mae, which along with the Federal Housing Administration, now buy more than 90 percent of all home loans compared to less than half before the crisis,” he said.
Despite the central role the two enterprises continue to play in the housing market, congressional Republicans have kept up their harsh criticism of Fannie and Freddie, contending that the financiers had a major role in triggering the housing crisis by encouraging loose lending practices aimed at making homeownership more affordable for people with marginal credit.
Tea party groups demanded their complete elimination in fielding candidates for the fall elections, though lately some have toned down their attacks on the enterprises.
“Taxpayers cannot afford to double down on government’s catastrophic gamble in the mortgage market,” said Bill Wilson, president of Americans for Limited Government, dismissing the idea of continuing to provide government guarantees on mortgages. “This will only place more pressure on the taxpayers and the national debt.”
Republican leaders privately concede that no alternative exists because of the collapse of the private mortgage market and, at best, they will have to phase out the enterprises slowly and carefully as they try to restart a private market for mortgages.
What to do with Fannie and Freddie promises to take center stage in the congressional debate this year, not only because the tea party and conservative Republicans have targeted them for extinction but also because President Obama pledged to make their future a top priority this year in his efforts to secure congressional action on his Wall Street reform bill last year.
Mr. Obama is expected to present his proposals for reforming Fannie and Freddie in mid-February. Treasury Secretary Timothy F. Geithner has said he expects that mortgage securities in the future will continue to need some sort of federal backing through Fannie and Freddie or some successor vehicle.