The Impending Reform of Fannie Mae and Freddie Mac

February 1, 2011

According to the public listings of meetings, Treasury officials have met with executives from several leading banking institutions, including Wells Fargo, Morgan Stanley, Credit Suisse and Goldman Sachs.  Executives from these banks are proposing ideas publicly through trade groups suggesting they become the new housing and finance leaders helping to bundle individual mortgages into securities stamped with a government guarantee.

Michael Barr, who worked on housing issues at the Treasury Department until the end of last month says, ” I don’t think that private shareholder-owned entities should issue government guarantees, adding, I think that creates the same conflict we had in the past.”

Sources are saying these banks are viewing the overhaul of the the failing Fannie Mae and Freddie Mac as a potential profit making opportunity for them.

The Obama administration is preparing a report, to be released by the end of the month, to address the future of Fannie Mae and Freddie Mac.  The administrations report is expected to address many issues with the government guaranteed institutions and whether that guarantee is needed at all for middle class homeowners.

Banks have told the administration that removing the guarantee would eliminate the widespread availability of the popular 30 year mortgage,the most popular loan package for middle class buyers, which would change the American housing market possibly causing an extreme dip in housing values across the U.S.

On Friday, Timothy Geithner, while speaking at the World Economic Forum and answering a question posed to him by Charlie Rose in which Rose asked in regards to the future of GSEs, namely Fannie Mae and Freddie Mac, what changes we could expect to see in the future. Geithner’s response although vague and brief,

“We still have a mess in the housing finance business – now almost completely dependent on the government. We’re going to lay out a set of reforms to crowd private capital back in the business – to dial back the role of the government over time to leave us with a system that will not be vulnerable to colossal failures [of the GSEs], and more generally in underwriting practices.”

This response could give us a glimpse into what the administrations plans may be.  A key point may be that they plan to “lay out a set of reforms to crowd private capital back in the business”, this statement could reveal their plans to allow banks to take on a stronger role in bundling individual mortgages into securities stamped with the government guarantee.  This could be a heavy blow to the housing market in the U.S. and to the economy as a whole.  We will learn more when the report is released and the administration shows their plans.

Related posts:

  1. Freddie Mac Needs Another Bailout
  2. Freddie Mac Raises Mortgage Fees
  3. More Changes Ahead for Freddie Mac and Fannie Mae
  4. Fannie and Freddie Planning to Aide Lenders
  5. Financial Reform Building Momentum

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