Barney Frank: Scrap Fannie Mae and Freddie Mac

Congressman Barney Frank (D-MA) wants to scrap Fannie Mae and Freddie Mac in favor of an entirely new mortgage-financing system. According to Frank, Chairman of the House Financial Services Committee and who previously supported the programs, “The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current forms and coming up with a whole new system of housing finance.”

Fannie Mae and Freddie Mac, which back a majority of the nation’s home loans, buy mortgages from lenders, insure them against default and supply new money to create new loans. Thanks to growing losses on these loans that threatened the health of Fannie Mae and Freddie Mac, the federal government took control of the programs in September 2008.  Since their seizure, Fannie and Freddie have been run by regulators and kept alive by $110.6 billion in taxpayer money.  Frank says that Congress needs to decide what to do with Fannie’s and Freddie’s remaining shareholders, as well as investors in the companies’ $5.4 trillion in mortgage bonds and $1.7 trillion in unsecured corporate debt.

Fannie Mae and Freddie Mac profit by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.  They currently own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made in 2009.

“We’re going to look at the whole question of housing finance,” Frank said.  “Sorting out the function of promoting liquidity in the market, and also the secondary market in general but then also doing some kind of subsidy for affordability.”

Fannie/Freddie were caught in the eye of the subprime meltdown.  In February of 2007, the residential mortgage-backed securities market crashed with sales plummeting 90 percent.  While reform is needed, Fannie and Freddie operate like a public option – by making home ownership more affordable and creating competition to commercial banks.  A positive step is the Deed for Lease program.  After foreclosure – at 57,000 homes in the first half of 2009 – the new program allows owners to lease their homes and avoid foreclosure.

Artificially creating/guaranteeing a market for home loans has lost billions. Hopefully, whatever entity replaces Fannie and Freddie will be prohibited from contributing to congressional campaigns and PAC’s.