The question of what should be done with Fannie Mae and Freddie Mac is drawing wildly different opinions.
"The current state is an opportunity to reform the two companies," said David Reiss, professor of law at Brooklyn Law School, in comments to ACUMA's recent annual conference in Las Vegas. "The biggest question is, what is the appropriate role for Fannie and Freddie? Some say they are doing the job they were supposed to, but others think we should just admit they aren't working and nationalize them."
According to Reiss there are four schools of thought regarding the two government-sponsored enterprises that are currently in conservatorship:
• Fannie and Freddie generally are doing their job, and just need tweaks to control the size of their portfolios and how they handle debt issuance.
• Affordable housing advocates concur that Fannie and Freddie are doing a good job, but say they need to do more to share benefits with those who need affordable housing.
• Fannie and Freddie should be nationalized, an outlook Reiss said has been taken more seriously only recently. He said one proposal is to merge the two companies with the FHA, which some point out puts underwriting in the hands of the government. "It is not clear if this is a good thing," he said.
• They pose a "systemic risk." In this camp, Fannie and Freddie are seen as holdovers from an earlier, centralized form of government and privatization is needed to move away from the current model. Reiss said this viewpoint argues the GSEs did a good job of creating the secondary market, but are not good for sustaining the market.
What's Next?
Similarly, Reiss said four options have emerged as possibilities for the future of Fannie and Freddie, all of which have potential flaws:
• They will become cooperatives owned by lenders, similar to the Federal Home Loan Bank system. "History does not show this system to be better than GSEs," he assessed.
• They will be broken up into several smaller companies. Reiss noted this scenario would spread risk, but "the benefit only has so much attraction because financial companies have a herd mentality when it comes to investing."
• They would be operated and regulated in the same manner as utility companies. Reiss said this utility model has gained traction in recent months. In theory, he noted, regulating pricing would limit the risk, but many wonder if the regulator would be up to the task of overseeing a complex business model.
• They would become generic financial services companies, much as Sallie Mae was converted from a GSE to a private company. "This would take lots of steps and a lot of money," he assessed. "We would have to acknowledge that spreads would go up, which would mean higher mortgage rates. Also, having Fannie and Freddie around placed many consumer-friendly practices in the secondary market, and some government entity would have to maintain that."
Favoring Privatization
Asked which of the four future scenarios he favors, Reiss said privatization.
"This is not the housing finance system of the 1930s or even the 1960s," he declared. "The products have changed. We need to treat housing finance like credit in general."
Because transition is "scary," Reiss believes any changes will take place very gradually. "Phasing in could take five to 10 years," he predicted.
"The GSEs are so big, there is no simple answer to making changes," he said. "Groups such as ACUMA need to be part of the process. People need to argue about the issues. Securitization is not the problem, but the way it was done was horrible--especially in the subprime market. Several parties were paid up front so there was no downside for bad behavior. Clearly, some attention has to be paid to aligning incentives of securitizers and investors."
