Reforming Fannie and Freddie: Is Now the Right Time?

In response to criticism by many in Congress that it should have added GSE reform to the financial reform bill, the Obama administration has repeatedly said the housing and mortgage markets are simply too fragile right now to weather the inevitable storm that debate would entail.


Still, next Tuesday, financial industry leaders, academics, economists and dozens of TV cameras will meet in a room at the Treasury Department for the first public forum on reforming the two mortgage giants which have been bleeding cash while still controlling 70 percent of today's mortgage market.

Administration officials have told me over and over that there will be no policy announcement on Tuesday; this is an open forum to look at and discuss the many proposals for reform of and transition from the current GSE conservatorship.

The Treasury Department has been soliciting proposals since last spring and now has several hundred, spanning the range from totally privatized to fully nationalized mortgage entities.

Many of the big players, like the Mortgage Bankers Associationand the Financial Services Roundtable,have produced similar ideas, with new private companies where the MBS, not the company, is backed by the federal government. Each has a series of safeguards for investors, mostly involving insurance funds and strict criteria for the types of mortgages allowed into the securities.

But as with any open forum on a topic so near and dear to all of us, i.e. the fate of the value of our single largest asset, the meeting has already invoked ire before it has begun. Community activists say they're not getting a fair place at the table, and financial bigwigs are suggesting that if they don't get their particular way they'll simply pull out of the mortgage market entirely.

No question these two entities, Fannie Mae and Freddie Mac, which have cost the taxpayers at the very least $148 billion on paper, not to mention irreparable, continuing and costly damage to consumer confidence in housing, must not exist in their current state for the long term.

I just wonder if now, or even January, 2011, when the Treasury Secretary has promised to deliver a reform proposal to Congress, is the right time to take this on? The housing market is still in deep hangover from the home buyer tax credit, job losses and lack of improvement in the job market are pushing foreclosures back up, and consumer confidence is so low right now that even in economically healthy local markets, potential home buyers are sitting tight on the fence.

Granted, much of Tuesday's motivation is political. The administration, heading into the fall elections, has to look like it's on top of the one big remaining issue in the financial collapse. But politics have a funny way of wreaking havoc on the markets, and I don't just mean the stock market, I mean the housing market as well. What we need now, above any more money thrown at housing, is a return of consumer confidence.

Americans need to believe in housing and in the ability of our economy to support housing. Taking down the only secure bastions of liquidity in today's mortgage market, immensely flawed as they are, or at least having big public forums that generate headlines that makeWall Streettraders think these two behemoths are coming down imminently, is, I believe, dangerous. Yes, government needs a plan for Fannie and Freddie, and no they should not exist as they are in the future. But is now really the time?

Questions? Comments?