GAO Defines the Future for Freddie and Fannie

Written by: Steve Cook   Fri, September 11, 2009 Beyond Today’s News, Crisis Watch


After excoriating Fannie Mae and Freddie Mac for a history of undermining market discipline, missing goals to help underprivileged groups and failing to support housing finance markets during times of financial need, the Government Accountability Office yesterday urged Congress to consider only three options for the future structure of the two government-sponsored housing enterprises.

1. Reconstitute the enterprises as for-profit corporations with government sponsorship but place additional restrictions on them. While restoring the enterprises to their previous status, this option would add controls to minimize risk, such as eliminating or reducing mortgage portfolios, establishing executive compensation limits, and converting the enterprises to association of lenders.

2. Establish the enterprises as government corporations or agencies. Under this option, the enterprises would focus on purchasing qualifying mortgages and issuing MBS but eliminate their mortgage portfolios. The Federal Housing Administration (FHA), which insures mortgages for low-income and first-time borrowers, could assume additional responsibilities for promoting homeownership for targeted groups.

3. Privatize or terminate them. This option would abolish the enterprises in their current form and disperse mortgage lending and risk management throughout the private sector. Some proposals involve the establishment of a federal mortgage insurer to help protect mortgage lenders against catastrophic mortgage losses.

Each of the three options involves trade-offs  and constitutes a radical change from the past model for the two companies, which were taken over by the government a year ago and operated by the Treasury Department under conservatorship during the past 12 months.

The House Financial Services Committee begins work this month on comprehensive financial regulatory reform, including reform of the GSEs.

There’s a link to a full copy of the report at the top of this article.

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