Republican Plan to Kill Fannie and Freddie Hinges on Timing

Government-seized mortgage companies Fannie Mae and Freddie Mac have been in Republicans' cross-hairs for some time. Last month, however, we learned that the Treasury also has plans for winding down the entities. This week, House Republican Conference Chairman Jeb Hensarling re-introduced legislation to shutter the firms. In some sense, it's not far off from what the Treasury plans. The differences mostly involve timing.

First, let's talk about the similarities. Both plans intend to wind down Fannie and Freddie. They each hope to do so by increasing guarantee fees and lowering the size of mortgages that they can back. They also both want to end the companies' affordable housing goals. The two plans also agree that the size of the companies' portfolios should shrink gradually.

So where don't Republicans and the Treasury line up? The general principles may be the same, but the details differ mostly along timing. The Treasury's plan appears to allow this process to take around ten years. The Republicans hope to end the firms' conservatorship in just two years and to be completely privatized within five years.

Really, these two plans aren't that far apart. They both agree on the general path that Fannie and Freddie must take, but which timing makes more sense? It depends in part on how the housing market stabilizes and how the quickly private market responds to taking on additional mortgage funding risk.

Because we can't know the future, it's hard to tell which plan is best. Considering their extent of dysfunction, it would be more desirable to eliminate Fannie and Freddie sooner if possible, like the Republicans want. But rushing to wind them down doesn't make sense if it causes the housing market recovery to be very difficult.

To remedy this dilemma, whatever plan adopted could utilize market-based triggers. For example, if in two years the housing market has stabilized, ample new mortgage funding mechanisms are in place, and investors have become comfortable again with private label mortgage-backed securities, then the process can proceed briskly. But if prices are still declining in two years, legislation is still pending to allow the private sector to take on more mortgage market risk, and the MBS market remains virtually closed, then a slower wind-down would be more prudent.

A compromise bill could be created that takes such principles into consideration. Perhaps that's where Congressional Democrats should chime in. Washington must signal to the market that it's serious about ending government support for most mortgages. Then, it will begin stepping in. But as long as Fannie and Freddie subsidize mortgages, banks and investors would be crazy to take on the risk themselves when they can push it to the government for cheaper. The private sector can't compete with ultra-cheap government-backed mortgages, so the process to wind down Fannie and Freddie must get those participants back into the game to gauge how quickly the government's exit can be.

Note: The Republican legislation does not lay out any additional role for the government in housing finance after Fannie and Freddie have been privatized. The Treasury, however, provided three options for the government's future role in mortgage funding. None of those proposals would provide new duties to Fannie and Freddie, however. So the above discussion really only applies to those companies. It's unclear where Democrats and the President will come down on housing finance policy alternatives, and whether they'll want the totally hands-off approach that some Republicans advocate.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

The Man Who Owns 40,000 Video Games

A short documentary about an Austrian gamer with an uncommon obsession

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus


The 86-Year-Old Farmer Who Won't Quit

A filmmaker returns to his hometown to profile the patriarch of a family farm


Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."


Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."


An Ingenious 360-Degree Time-Lapse

Watch the world become a cartoonishly small playground


The Benefits of Living Alone on a Mountain

"You really have to love solitary time by yourself."

More in Business

Just In