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.
But in light of fierce opposition among Republicans to further federal involvement, the administration may present several options for dealing with Fannie and Freddie in the future.
"It's safe to say there's no clear consensus yet on how best to design a new system," Mr. Geithner said. "But this administration will side with those who want fundamental change."
Proposals from liberal groups and Democrats have centered on the government providing a kind of last-resort insurance for the mortgage market just as it provides last-resort financing for the terrorism-insurance market.
Banks that originate and pool the mortgages would have to sustain losses and exhaust their resources before the government would step in and backstop the securities. And investors and borrowers would have to explicitly pay upfront for the government's guarantee.
Democrats point to Standard & Poor's opinion and statements by major investors such as Pimco's Bill Gross, co-founder of the world's largest bond fund. He said he is reluctant to buy mortgages that don't have a government guarantee unless borrowers have made substantial down payments of 30 percent or more or are willing to pay significantly higher interest rates.
The criteria Mr. Gross laid down shows how difficult it would be for borrowers to obtain loans in a privatized market, since many today continue to have trouble coming up with even the standard 10 percent to 20 percent down payments and have flocked to federal housing programs that allow smaller upfront investments.
Moreover, the banking industry has been warning legislators that wholesale elimination of Fannie and Freddie could result in the disappearance of the 30-year mortgage — a feature that was not available for home purchases before the creation of the two enterprises in the 1930s.
The loss of 30-year loans would hurt borrowers and might change the structure of the housing market, in which prices have risen solidly over the years based on the availability of such low-cost, long-term financing.
In the future, borrowers would have to choose from an array of riskier and more expensive options such as 10-year loans and adjustable-rate mortgages that do not guarantee the low, steady monthly payments provided by 30-year loans.
Heeding warnings from bankers, real estate agents and developers who contributed heavily to last fall's Republican campaigns, some GOP leaders are signaling a willingness to work with Democrats on a bipartisan plan that would continue to provide a limited federal guarantee fully covered by fees to the government.
But others are expected to trumpet their criticisms of Fannie and Freddie in hearings next month before several House committees that are sure to be crowd-pleasers for conservative constituencies.
Rep. Darrel Issa, chairman of the House Oversight and Government Reform Committee, gave a taste of what is to come Monday when he pointedly questioned why the government has paid more than $160 million in legal fees to defend former Fannie and Freddie executives.
"At a time of runaway federal deficits and 10 percent unemployment, it is extremely distasteful for the American taxpayers to be forced to pay the legal bills," the California Republican said, charging that the former executives were "central players in the financial crisis."
In an attempt to make good on Republican promises to do away with the enterprises, one conservative plan drafted by analysts at the American Enterprise Institute would eventually eliminate them and try to restart the private mortgage market by gradually lowering the limits on the size of loans that Fannie and Freddie can guarantee. The limits currently range up to $729,000 in major metropolitan areas.
"There is near-universal agreement that Fannie and Freddie should not continue" as they have for the past three decades, said Alex J. Pollock of AEI, though there are "numerous conflicting ideas" on how to replace them.
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