Elimination of Fannie and Freddie: More of The Same?

Recent government plans to overhaul housing finance call for mortgage programs Fannie Mae and Freddie Mac to be replaced by a number of smaller companies that would carry out the current role of these two large agencies. Currently both Fannie and Freddie create and sell mortgage bonds backed by the federal government, but current proposals suggest that these smaller firms would do so explicitly, operating on private capital without trading on a stock exchange. Also, unlike the two giants, portfolios would not be held by the smaller firms.

The issue in Washington for many lawmakers is that the government would probably wind up having to guarantee a chunk of the mortgage market handled by these smaller firms, with taxpayers taking on the credit risk of home loans once again—the exact scenario the breakup of Fannie and Freddie is supposed to avoid. According to the plan, the government would be paid for its guarantees; however, many critics worry that this type of backing is all too often under-priced.

Another problem perceived with the plan is that the government would compensate for any one firm’s losses by imposing fees on the others.

Overall, the proposal’s approach doesn’t really change the current situation. It doesn’t seem to make a ton of sense to work toward the elimination of Fannie and Freddie if they’ll only be replaced by more of the same.

The approach also circumvents the major issue that the nation must eventually face, whether taxpayers should finance mortgages in order try to preserve 30-year, fixed-rate loans with a pre-payment option.