Time to Rethink Fannie and Freddie

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The government's role in the new system ought to be a lot clearer than it was in the past, according to industry and consumer advocates. Federal officials traditionally insisted they had no legal obligation to stand behind Fannie and Freddie, even though investors assumed they would. When the market imploded, Treasury stepped in, despite past disclaimers.

Executives with the Mortgage Bankers Assn. and the National Association of Realtors say mortgage-backed securities that meet government standards should receive an explicit guarantee. Without it, they say, investors will balk at buying mortgage bonds, especially in times of economic distress. "To have long-term investment in a 30-year fixed mortgage, you have to have some confidence that there is government backing," says Paul Leonard, a lobbyist for the Financial Services Roundtable, whose members include JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), and BlackRock (BLK).

These industry-inspired proposals are less radical than some ideas emanating from Congress. During debate over the financial-services overhaul, Republicans offered dozens of amendments to abolish Fannie and Freddie, only to be rebuffed by Democrats. Led by Senator John McCain of Arizona and Representative Jeb Hensarling of Texas, Republicans say Fannie's and Freddie's competing missions—to serve shareholders and promote homeownership among low-income households—drove the financial institutions to ruin. The Republicans want the government to abandon any role in housing finance.

The Obama Administration and Democrats, including House Financial Services Chairman Barney Frank of Massachusetts, insist that the government continue to promote homeownership. "We should not compromise any of our core policy goals in the decisions we make in structuring our housing finance system," Housing and Urban Development Secretary Shaun Donovan told Frank's committee in April.

One thing is for sure: The White House will not lack for advice on the future of Fannie, Freddie, and the housing market. "Everybody's telling them, 'Don't do anything stupid,' " says Barry Zigas, director of housing policy for the Consumer Federation of America. "It's easy to forget that this system worked awfully well for 75 years." That is, until it didn't.

The bottom line: Industry and consumer advocates agree on moderate reform of Fannie Mae and Freddie Mac.

Woellert is a reporter for Bloomberg News. Miller is a reporter for Bloomberg News.

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