Fannie Mae and Freddie Mac are under lots of pressure by the government.
The two mortgage giants has been whacked by House Republicans grilling them on the federal bailout and vowing to stop the government’s longstanding use of the companies to reduce the cost of mortgage loans. But the Republican takeover of the Congress could make that goal harder to achieve. So far, Fannie Mae’s and Freddie Mac’s fates depend on the hands of the Democrats and, in present political situation, even longtime allies like Massachusetts Representative Barney Frank have allowed letting the companies go.
But the U.S. administration plans to have a new form of federal subsidy in replacement of Fannie and Freddie. This has let both the Republicans and Democrats face two choices whether to compromise, or stand firm and try to blame one another.
There are great reasons to expect that talks will eventually result to agreement. Many experts agree that Fannie and Freddie should not endure. The failure to act could enrage voters. And there must be a concrete resolution by the end of 2012, when the present law requires the end of government’s support for the companies.
The House Republicans are firm on its goal to liquidate the companies, and oppose to the plan of replacing Fannie and Freddie. Meanwhile, some Democrats are murmuring that they do not mind the status quo. Fannie and Freddie make sure that families can avail of mortgage loans. But the companies can no longer go after profits because of the government ownership. This is how they got into trouble.
According to Brian Gardner, a political analyst for the investment bank Keefe, Bruyette & Woods, the gap between House Republicans and Treasury is getting wider and that the issue will go on for the next two years or even more and doesn’t seem to end.
Leading House Republicans have been unambiguous in their exigencies for the cutting off of ties between the government and Fannie Mae and Freddie Mac. Alabama Republican Representative who might probably hold the office of the Financial Services Committee, has expressed support for legislation that would impel the immediate commencement of the process.
Rep. Bachus told CNBC in an interview that the loss of government subsidies for mortgages might hurt borrowers but was essential. There is a need to break the addition to government funding, he said. And like any addiction, withdrawal process takes a lot of time, but the sands of time won’t drop unless one flips it down.
Some analyst doubt the Republicans will uphold this hard line. Many stakeholders and powerful constituencies such as the national associations of real estate agents and home builders and leading figures in the mortgage industry, have publicly requested the government to maintain a role in housing finance. Karen Shaw Petrou of Federal Financial Analytics said it is in nobody’s interest to let this go astray, either for financial market or for political reasons.
The Obama administration has repeatedly said that the companies should be replaced. The Congress requires the administration to present a proposal by January. A new form of government insurance, in which lenders would pay the government to absorb disastrous losses, is the much-talked about possibility. Details of which have not been released yet. Both the administration and the House Republicans have shown willingness to postpone the debate, with the same concern for stability of the housing market. The government backs more than 90 percent of new mortgage loans, mostly through the two companies. Thus, calls for change are often faced with acknowledgements that now may not be the moment.
The progress of the two companies could also reduce the sense of urgency. Freddie Mac announced Wednesday that it incurred a loss of $4.1 billion in third quarter and said it needed a new federal support amounting to $100 million, totaling its bailout to $64.2 billion. However, the latest request is very small compared to past quarters, supporting a recent federal report that found the bailout of the companies may be substantially complete. Fannie may will announce its earnings on Friday.
Because of this, some observers believe that the government will not be able to transform the mortgage industry, at least not for the next several years.
Jeremy Diamond, managing director of Annaly Capital Management, a leading investor in mortgage securities, said that the market in general has been consistent in looking past the headline risk of this to the basic constancy of mortgages and mortgage finance in the United States. He said that he can’t call the market optimistic, but realistic.
