Fed Panel Pondering Fannie, Freddie Future

Fed Panel Pondering Fannie, Freddie Future
August 1, 2009

As consumers across the country continued to default on mortgages, the nation’s two largest providers of home loans—the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—became insolvent and were taken over by the government, which has yet to decide what to do with the two former government-sponsored entities.

A pair of financial experts offered their thoughts on how to deal with these institutions at the Federal Reserve Bank of Chicago’s annual conference on bank structure and competition.

‘Role Needs Clarification’

Diane Casey-Landry, senior executive vice president of the American Bankers Association, called for Fannie Mae and Freddie Mac to be taken out of conservatorship.

“These agencies are important to home ownership and the banks that make the mortgage loans,” said Casey-Landry at the May meeting. “Their role in providing a secondary mortgage market needs to be clarified within the broader context of the new regulatory structure.”

But Thomas Stanton, a fellow with the Center for the Study of American Government at Johns Hopkins University, said the government should place Fannie Mae and Freddie Mac into receivership and allow them to function as wholly owned government corporations to support the mortgage market.

“Fannie Mae and Freddie Mac committed serious misjudgments that helped bring about their insolvency,” Stanton said. “The two companies managed to fend off capital standards that would have reduced their excess leverage and provided a cushion to absorb potential losses.”

‘Outlived Its Usefulness’

“For many reasons, the GSE [government-sponsored entity] has outlived its usefulness as an organizational form,” Stanton said. “The GSEs squandered a policy tool that the government had used for decades: the perception of an implicit rather than an explicit federal guarantee of their debt obligations. That means that the government would have to provide some type of explicit guarantee if the GSEs were to be restored.”

Stanton said proposals to craft special rules, such as trying to regulate Fannie and Freddie as public utilities or by limiting them to conservatorship ownership, would not overcome their inherent vulnerabilities as politically controlled entities.

“Regulated companies too often capture their regulators,” Stanton said. “Many a political scientist has written about the dominance of the Interstate Commerce Commission by the railroads that the ICC was supposed to regulate. The GSEs would simply shift the application of their political power from domination of their past regulators to the new public utility regulator.”


Phil Britt (spenterprises@wowway.com) writes from South Holland, Illinois.