Fannie Mae and Freddie Mac Overhauls May Transform Mortgage Giants

No longer traded on the New York Stock Exchange, the two mortgage finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) may not even exist in their current forms after a revamp of the U.S. housing finance system, a top Treasury Department official said on Tuesday, Reuters reported.

Reuters obtained the prepared testimony of Michael Barr, assistant secretary for financial institutions, which he is to deliver Wednesday to the House Financial Services Subcommittee on Capital Markets. "Private gains will no longer be subsidized by public losses, capital and underwriting standards will be appropriate, consumer protection will be strengthened and excessive risk-taking will be restrained," said Barr.

Fannie and Freddie, which buy residential mortgages to free up capital for banks to lend again, were seized by the government in 2008 to prevent a collapse of the mortgage market. Together, they've absorbed $150 billion in government aid, and just recently, Fannie asked for another $1.5 billion, while Freddie requested another $1.8 billion in additional aid.

How to restructure the mortgage industry behemoths is a question that policymakers, pundits, banking industry experts and others are still grappling with. At DailyFinance, columnists Dan Burrows and Charles Wallace joined the debate with a range of opinions from complete nationalization to total privatization.

Treasury Stands Behind Fannie and Freddie

Treasury Secretary Timothy Geithner asked leaders from the mortgage industry for their views last month, and the Obama administration has promised that it will have a plan by January. But any long-term changes to Fannie and Freddie's structure would have to be approved by lawmakers, and congressional Republicans and Democrats don't necessarily agree on what the new system should look like, so proposals might change if the balance of power shifts after November's midterm elections.

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Barr reiterated that the Treasury was standing behind the institutions, according to Reuters, saying they "have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any debt obligations."

But separate testimony by Edward DeMarco, acting director of the Federal Housing Finance Agency, takes a different tone, questioning yet again the efficiency of private vs. government controlled enterprises.

DeMarco says that "Legislation is needed to restructure and strengthen our nation's housing finance system and to resolve the Enterprise conservatorships." But he questions whether the government could do a better job of pricing the risks of mortgage defaults: Replacing Fannie and Freddie's guarantees "does not resolve all the shortcomings and inherent conflicts in that model, and it may produce its own problems," he said.

"It is reasonable to question whether all conventional mortgages warrant a government guarantee," he added. "If the government backstop is underpriced, taxpayers eventually may foot the bill again."