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Bailout Black Hole

By: Kari English

The government decided to seize Fannie Mae and Freddie Mac in September 2008 and place them into conservatorship. Two years later, Fannie and Freddie are now 80 percent owned by U.S. taxpayers and have drawn $145 billion from an unlimited line of government credit, according to a June article by Bloomberg. The ever-increasing cost of that decision has everyone scrambling to figure out what to do with the government-sponsored enterprises. The most common proposals include their gradual wind-down and liquidation, their privatization, the incorporation of their functions into a federal agency or their dissolution into smaller companies.

Many Republicans propose getting rid of Fannie and Freddie altogether, or at least restructuring them. Republicans attempted to include a phase-out of the mortgage companies in the financial reform bill. But it didn’t make the final cut. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, argued that because the two firms weren’t taking losses on new loans, the measure wouldn’t save taxpayers any money.

An idea being weighed by the Obama administration involves reconstituting Fannie and Freddie into a “good bank” with performing loans and a “bad bank” to absorb the rest.

Another potential solution is a financial instrument called a covered bond, which has been used in Europe since the 18th century to finance residential mortgage lending. Unlike securitizations in the U.S., covered bonds remain on the originating bank’s balance sheet.

Yet another suggestion, this one from the Mortgage Bankers Association, proposes an entire new line of mortgage-backed securities.

The American Bankers Association takes the position of keeping the GSEs as long as they stay in the secondary market and their regulator prevents them from entering the primary market.

The Independent Community Bankers of America does not suggest a specific resolution for the GSEs, it just believes that whatever is done with them, Congress needs to make sure community banks will have access to the secondary market. Jack Hopkins, president and CEO of CorTrust Bank, Sioux Falls, S.D., told Congress in April on behalf of the ICBA that there should be more than one secondary market provider to foster competition and provide better access for community banks.

To learn more about the various proposals and how they might affect community banks, click the link below.

What To Do With Fannie Mae & Freddie Mac?

Kari English is senior editor of BankNews.

Copyright © August 2010 BankNews Media


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