May 19, 2024

In Congress, Bills to Speed Unwinding of 2 Giants

The proposals would dismantle Fannie and Freddie in a most ironic manner. The mortgage giants thrived for decades by behaving like private companies at public expense. The cumulative effect of the eight bills would make the companies behave like federal agencies while stripping away the advantages.

Fannie and Freddie would be required to pay their employees according to federal wage scales. The companies would be subjected to regular oversight by an inspector general and required to ask Treasury before borrowing money.

But at the same time, the companies, which provide financing to lenders, would be required to charge the same prices as private investors. They would be prevented from serving their basic purpose as a source of cheap money for mortgage loans.

“This will allow more private-market participation in the housing finance market, which is critical for the long-term health of the housing market and the overall economy,” said Representative Randy Neugebauer, a Texas Republican who is one of the eight party leaders who are each sponsoring one piece of the legislative package.

The proposal to shut down Fannie and Freddie answers a promise made by many House Republicans during the midterm elections. And by proposing eight separate bills, Republicans have preserved considerable flexibility to negotiate with the White House, increasing the chances that some elements will succeed.

There already is agreement that the companies should be closed, gradually allowing private investors the opportunity to finance mortgage loans.

The main difference is a question of timing. The Republican plan would require Fannie and Freddie to stop subsidizing mortgage loans through low-cost financing over the next two years, and to sell most of their enormous mortgage holdings over the next five years.

The administration envisions a process that may take a decade and it has shown no eagerness to begin while housing remains in the doldrums.

“We look forward to working with Congress to wind down the G.S.E.’s at a pace that does not damage the fragile housing market or threaten the ongoing economic recovery,” a Treasury spokesman, Steven Adamske, said, using the abbreviation for a government-sponsored enterprise.

The consequences of this disagreement were on display Tuesday as the administration introduced new rules intended to discourage reckless lending.

The rules require banks to retain some risk of loss when they sell loans to investors, except for loans made on the most conservative terms, including a down payment of at least 20 percent. But the rules also stipulate that loans sold to Fannie and Freddie are not subject to the requirement so long as the companies remain wards of the state.

Almost all the financing for new mortgage loans continues to flow through the federal government, and the administration is concerned that any new roadblocks would exacerbate the woes of the housing market. Moreover, the government can prevent Fannie and Freddie from using the exception to acquire high-risk loans.

House Republicans, however, say that investors will not return until the government leaves. One bill proposed Tuesday would make lenders retain risk even when they sell off loans to Fannie and Freddie.

Representative Scott Garrett, the New Jersey Republican who is chairman of the subcommittee that oversees Fannie and Freddie, said it was time to start the process.

“We have to make certain that government policies do not continue to crowd out the private sector,” Mr. Garrett said.

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