Uncle Sam's ugly, unmarriable children, Fannie and Freddie already have a mountain of misery and challenges and their problems are about to get bigger as signs of the softening real estate market and anticipated foreclosures are expected to climb and continue.
The troubled twins have already reclaimed nearly as many of the homes as they did in 2009 and the year isn't over yet.
Today I went across the aisle to speak with Rep. Paul Kanjorski (D) Pennsylvania, Chairman of the Capital Markets Subcommittee to ask him his solutions on what to do with Fannie and Freddie.
LL: What were the biggest take aways out of your hearing on Fannie and Freddie this week?
The Federal Housing Finance Agency (FHFA) has applied a tourniquet to stop the bleeding. While there have been substantial losses on Fannie Mae’s and Freddie Mac’s pre-conservatorship activities and practices, their business moving forward is now on a much firmer footing.
We also learned that the Treasury Department and FHFA are working to protect taxpayers by requiring Fannie Mae and Freddie Mac to pay a dividend of 10 percent on the senior preferred stock purchased by the government, investigating the issuers of private-label securities, improving the credit quality of loans put into new mortgage-backed securities, forcing originators to buy back faulty mortgages, and taking action against individuals who strategically default.
LL: Do you have any concerns over the Affordable Advantage plan?
Rep: Yes, I have concerns about all zero-downpayment mortgages, but at the hearing we learned that FHFA is in the process of stopping the program, which is relatively small. In my view, homebuyers must have skin in the game by making down payments.
LL: Should the single-family side of GSEs take a cue from the multi-family side which has performed well and has been profitable?
Rep: Large losses from single-family side are the result of Fannie Mae’s and Freddie Mac’s reckless risk-taking during the Bush era. The FHFA has put an end to those risky activities. In their current operations, Fannie Mae and Freddie Mac must take all appropriate actions to protect taxpayers.
As we work on reforming the housing finance system going forward, we should certainly look more at the effectiveness of the multi-family programs at Fannie Mae and Freddie Mac to determine best practices.
LL: St. Louis Fed President and CEO James Bullard is calling for breaking up the GSEs into "regional companies" so the market could be open to the private players and restructure their operating incentives. Do you think that is a good option?
Rep: Any action that Congress takes to address the future of housing finance must address the systemic risk issue. Having many companies involved in the securitization process could help to decrease the potential of systemic risk if one of them fails.
I asked Assistant Secretary Barr a question about this very issue at the hearing. He indicated that we ought to first look at the bigger picture issues of housing finance before determining the desirability of establishing multiple players in the securitization market for conforming loans.
LL: When will we see a cogent strategy plan for the GSEs with so many homes underwater?
Rep: The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Treasury Department to produce a report to Congress addressing the future of the U.S. housing finance system by January 31, 2011.
LL: How do you think the GSEs should be reformed?
Rep: As I said at the hearing, my goals in these debates on the future of housing finance are to limit taxpayer risk and establish a more stable, long-term funding source to help hardworking, responsible middle class American families to buy a home with an affordable mortgage.
We also need to ensure that all participants in our housing finance system, especially credit unions and community banks, have access to capital to make home loans.
LL: What incentives should be put in place to help the private market become an innovative source of mortgage financing?
Rep: The Dodd-Frank Wall Street Reform and Consumer Protection Acthas already laid the foundation for change by adjusting securitization rules, better regulating rating agencies, modifying appraisal practices, and standardizing mortgage underwriting.
The adoption of these "process" reforms, when fully implemented, will help to level the playing field and align the incentives of the private sector to bring private capital into the housing finance sector.
LL: What is needed to prevent bank runs to the shadow banking sector?
Rep: The Dodd-Frank Act has brought the shadow banking sector into the light. Its provisions will authorize the federal government to get more information about the shadow banking sector, unwind the largest financial institutions, and encourage more transparency and trust in our financial markets. Together, these reforms will help to stabilize the markets.
LL: How do we address the "too big to fail" problem? Will a liquidation facility be formed for large financial firms?
The Dodd-Frank Act directly addresses this issue as it includes the Kanjorski "too big to fail" amendment. The Kanjorski amendment empowers federal regulators to rein in and dismantle financial firms that are so large, inter-connected, concentrated, or risky that their collapse would put at risk the entire American economic system.
Therefore, American taxpayers should no longer be on the hook for bailouts, as financial companies would not be able to become "too big to fail." Moreover, the bill has provisions allowing for the orderly liquidation of large financial firms and requires big financial companies to have funeral plans in place to wind down their operations.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."