The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market. The bad debts the firms own would be placed in new government financial institutions – so-called “bad banks” – that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.
The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Fannie Mae and Freddie Mac have government charters to buy home loans from banks, which they repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.
The proposal, which is preliminary and one of several under discussion, is scheduled to be taken up today by the White House’s National Economic Council. The government’s efforts so far “have taken the risk out of those two firms,” Treasury Secretary Timothy Geithner said. “The only question that remains is what form, what structure they ultimately will take.”
In an interview yesterday announcing that he would step down this month, James Lockhart, the chief regulator of Fannie Mae and Freddie Mac, said there needs to be a “good bank, bad bank” structure.
Good Bank, Bad Bank
The “bad bank” would be a depository for Fannie Mae’s and Freddie Mac’s bad assets. Then, the government could create new companies, if it chose to do so, that would attract private investment in support of mortgage finance. Options for the “good banks” include consolidating the firms into a single government agency, leaving mortgage finance purely to private banks or maintaining a hybrid model.
A major problem has been that Fannie Mae and Freddie Mac own and insure trillions of dollars of existing mortgages. With the economy still in a deep recession, joblessness rising and defaults on home loans expected to continue to increase, there is great uncertainty over the size of future losses at Fannie Mae and Freddie Mac. That, in turn, is likely to drive investors from committing money to the companies.
Tags: debt, foreclosure, loan, mortgage
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