The recent financial crisis has shed a glaring light on the future of Fannie Mae and Freddie Mac. In response, the Treasury Department has developed three options on how to deal with the government assisted mortgage giants. The recommendations are part of the white paper mandated by the Dodd-Frank Act and specifically address the nation's housing finance system.
Mortgage Market Privatization
Since Fannie Mae and Freddie Mac were born out of the necessity of the time, the mortgage industry has featured both a government assisted and private mortgage market. One of the proposed changes to the current system is completely eliminating the government-backed lenders and converting to a completely privatized mortgage market. This option would limit insurance coverage to the government entities of the Federal Housing Administration (FHA), the U.S. Department of Agriculture, and the Department of Veterans' Affairs.
As described by the Treasury, the benefit of this change would help minimize the financial risk for investors and minimize the involvement of the American taxpayer. Additionally, lower income families would gain greater access to credit. The downsides of this program is twofold; mortgage rates would increase across the board and raise the cost of home ownership and it would prevent the Treasury from easily assisting during a time of financial rife.
Break In Case of Emergency
The second option featured in the Treasury Department's white paper would more closely align with the original vision of Fannie Mae being an emergency resource. The overall system would be privatized as suggested in the first option, but would allow an easier path for the government to assist during a crisis.
When Fannie Mae was first launched in 1938 under the jurisdiction of President Roosevelt, the creation of the agency was to help lenders get back in the business of issuing home loans and other lines of credit after the Great Depression. The goal of the second proposal would provide the Treasury a way to "minimal presence" on a daily basis, but allow backdoor access to the system when the economy took a turn for the worse.
The leverage is expected to come from providing a guaranteed fee on specifically designed loans that would kick in when the country was in crisis mode. The proposal suggests the alternative "to gauge its amount of insurance from small amounts during boom years and increase it during rough patches," (HousingWire.com).Increased mortgage rates across the board would be the negative impact if this option is implemented.
Disaster Fund
The final Treasury Department proposal involves a private mortgage market backed up by the "securities of a targeted range of mortgages," (Treasury Department). One thought for how this could be managed includes the creation of companies complete with "capital and oversight requirements from the government," (HousingWire.com). The organizations would be charged with issuing mortgage-backed securities featuring restrictive underwriting rules combined with government "reinsurance" that would go to shareholders only if the business were completely destroyed.
Of all the options, this is the one that would help keep mortgage rates low, but the risks include continued taxpayer and government vulnerability.
Treasury Secretary Tim Geithner estimated that it would take between five and seven years to implement any of the proposed schemes. Regardless of what plan is chosen by Congress, the transition must be slow enough to prevent any further losses to the financial agencies and the taxpayer monies that went to bail them out and prop them up. According the Geithner the evolution would take place in three stages:
- Phase One: Initial steps as outlined in individual plan plus establishing new private mortgage market rules.
- Phase Two: A two to three year change featuring "a point of accelerating the pace of transition."
- Phase Three: New system execution.
