Showdown for Fannie & Freddie

The epic drama of Wall Street bailouts and Main Street foreclosures riveted the nation in 2009. Meanwhile, financial industry groups and Washington policy advocates have been prepping for the big story of 2010: The fight over the future of Fannie Mae and Freddie Mac -- and with them, the fate of the 30-year, fixed rate mortgage that built the American dream.

The Obama administration has said that by February, it will lay out its vision for Fannie and Freddie, which in some form have been the bedrock of home mortgage financing since 1938. For months now, industry and consumer groups have huddled over bullet points, figuring out their official positions.

On the basics, they come surprisingly close to a consensus. Bankers and consumer groups alike want to essentially sign Fannie and Freddie up as contestants on The Biggest Loser. In place of gi-normous shareholder-owned, government regulated companies on a quest for stratospheric stock prices, the feds would back mini-Fannies that would sell and guarantee mortgage-backed securities under federal regulation. That would ensure that most Americans would continue to have access to long-term mortgages at fixed interest rates, something that wouldn't likely happen if left to the private market.Back in August, the Mortgage Bankers Association came out with its version of that agenda, asking government to limit the risks of government-backed mortgage securities, take on whatever risk is left over, and get out of the way. Now, the liberal Center for American Progress, working with consumer and housing groups, is weighing in on what the next-gen Fannie/Freddie ought to look like. The Wall Street Journal snagged an advance copy, and it shows a much more aggressive vision for government's role. The lending institutions' profits would be limited, like a public utility's. And, while Wall Street firms could still sell mortgage-backed securities, too, they would have to follow new rules that would limit the risks they could take. The Center's plan would also carry forward important parts of Fannie and Freddie's DNA, including support for financing rental housing and assuring that credit-worthy borrowers excluded from the lending market can get mortgages.

If we know one thing about Washington, it's that it is no place for reasoned consensus. For years, Fannie and Freddie have been targets of a campaign by conservatives who objected, on principle, to having government involved in the mortgage markets. The conservatives were backed up by aggressive lobbying from Wall Street. Even now that the investment banks have gone splat, their influence lives on in groups like the American Securitization Forum, which has been moving ahead with its own "Project Restart," based on the idea that the credit securities industry can best regulate itself "by developing commonly accepted and detailed standards for transparency, disclosure and diligence."

Despite all the world has painfully learned in the credit crisis about the risks of deregulation and unfettered markets, expect to hear a lot of talk in Congress in the coming year about the risks of keeping government in the mortgage game. There will also be heaping truckloads of accusations that Fannie and Freddie caused the mortgage crisis (reality check: they really, truly didn't).

The increasingly outspoken Wall Street Journal weighed in yesterday with an essay by reporter James R. Hagerty, "What's So Great About 30-Year Fixed-Rate Mortgages?" that asks whether Americans have grown too attached to a government-managed system that props up fixed-rate, long term home loans.
"The risk of interest-rate fluctuations doesn't go away; it just ends up with other people. Much of it ended up with Fannie Mae, Freddie Mac and other buyers of mortgage securities (who later passed on some of their losses to the U.S. taxpayer, typically a homeowner with a fixed-rate mortgage)."
But isn't the whole point of investing, in mortgage securities or anything else, to take on risk in order to reap rewards, and to do it wisely? The 30-year fixed-rate mortgage is what made homeownership a stable prospect before it became a trip to the casino. We're in for a showdown between the legacy of Bill Clinton, who pushed government to support home ownership (and whose ex-chief of staff John Podesta runs the Center for American Progress), and the heirs to George W. Bush's campaign to crush Fannie and Freddie so that unregulated Wall Street could take over the home lending business. The outcome will determine what your next mortgage will look like.
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