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Fannie, Freddie Need a Permanent Fix

washingtonpost.comMay 4, 2013

By Editorial Board

AMONG THE many pieces of unfinished business remaining from the financial crisis, none is more important than reforming mortgage finance. Fannie Mae and Freddie Mac, the government-sponsored enterprises that own or guarantee more than $5 trillion worth of U.S. mortgages, have been under direct federal control since their collapse in mid-2008. Having absorbed $170 billion in government bailout money, they are now profitable and are likely to remain so for years to come. But even though Fannie and Freddie are no longer a drain on the U.S. Treasury, the issue of how to restructure government’s role in the home loan market so as to avoid a future bailout remains critical.

It is no criticism of Rep. Mel Watt (D-N.C.), a knowledgeable member of Congress, to say that his nomination to be the chief regulator of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, does nothing to advance their restructuring.

Such an effort might succeed if it is bipartisan, but it will surely fail if it becomes polarized. In naming Mr. Watt, President Obama chose not a technocrat but rather a politician sure to stir Senate Republican opposition. Mr. Watt was the favorite of congressional Democrats and liberal housing policy advocates whose top priority for Fannie and Freddie is not long-term but short-term: to underwrite more aggressive loan modifications, including principal reductions, for distressed homeowners.

The acting FHFA chief, Edward J. DeMarco, opposes that, and Mr. Obama’s progressive base has been clamoring for Mr. DeMarco’s head, accusing him of punishing the middle class and stalling economic recovery.

Last July, Mr. DeMarco concluded that the benefits of principal reductions — avoided defaults, enhanced economic growth — would be outweighed by the costs of inducing borrowers who could pay their loans to default. A new Congressional Budget Office (CBO) analysis, requested by Mr. Watt and others, finds instead that a principal-reduction program “would probably result in small savings to the government, slightly reduce mortgage foreclosure and delinquency rates, and slightly boost overall economic growth” — as compared to current policy, which contemplates only interest-payment reduction.

Our interpretation is that whether Mr. DeMarco or the CBO is right (Mr. DeMarco has not yet responded to the CBO paper), this is a close policy question upon which the entire U.S. economy does not hinge. At most 1.2 million borrowers — 4?percent of those with mortgages backed by Fannie and Freddie — would even be eligible, the CBO said. Mr. DeMarco is reasonably concerned about fairness not only to borrowers in or near default but also to those who have sacrificed to stay current.

The housing market seems at last to have bottomed out: Prices are rising at the fastest rate in seven years. Underwater mortgages, though still a drag on the economy, are becoming less of a burden. According to CoreLogic, a real estate data service, total negative equity was $628 billion at the end of 2012, down from $801 billion in 2009.

Principal reduction, therefore, is becoming yesterday’s issue. What matters for the future is a permanent fix to the mortgage-finance system. That means winding down Fannie and Freddie and building new structures free of their design flaw — socialized risks and privatized profits. Mr. Obama’s Treasury Department urged such a solution more than two years ago but has yet to propose legislation. That’s what the president and Congress should be working on now.

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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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