Panel debates future of Fannie, Freddie

Although Senate Banking Committee members and witnesses Thursday agreed that changes in home financing giants Freddie Mac and Fannie Mae must be part of regulatory reform, there was considerable disagreement over whether their role of stabilizing and stimulating the home mortgage market could be privatized.

Banking Committee Chairman Christopher Dodd, D-Conn., raised the question, without indicating his preference, while Banking ranking member Richard Shelby, R-Ala., indicated support for privatization and Sen. Bob Corker, R-Tenn., said the financial crisis provided a "great opportunity" to end the government competition to private lenders.

The main witness, Edward DeMarco, acting director of the Federal Housing Finance Agency, agreed privatization or other changes to the two government-sponsored enterprises should be considered. But he warned there would be a long, difficult transition because of the massive amount of mortgages they hold.

If government support were withdrawn, DeMarco said there would have to be a clear demarcation between existing loans and those with no government backing.

William Shear, director of financial markets and community investment at the Government Accountability Office, was highly critical of the role Freddie and Fannie played in the collapse of the securities market and presented three options for how Congress could treat them.

One would be to retain their status as for-profit enterprises with government sponsorship, but add tight controls on the types of loans they could underwrite.

Another would be to make them a federal corporation with a limited role of purchasing sound mortgages and avoiding the kinds of complex transactions that created the financial crisis. The federally mandated role of promoting home ownership for low-income and minority families would be shifted to the FHA.

The third option Shear offered was privatization or termination, leaving the secondary mortgage business to the private sector.

That option was endorsed by Peter Wallison, a former general counsel at the Treasury Department now with the American Enterprise Institute.

Wallison agreed with DeMarco that a transition to a private sector operation would be prolonged and difficult and warned that continuing the massive financial support for the GSEs would make private financing more expensive. That could lead to the GSEs assuming the credit risk for the entire market, he said.

DeMarco, whose organization was created by the Housing and Economic Recovery Act of 2008, said the total federal support for the GSEs since they were put into conservatorship was about $1 trillion.

Although they have shed many of the risky loans and have improved their financial condition, "the short-term outlook for the enterprises remains troubled and likely will require additional draws" on the government funds, he said.

Asked by Sen. Jim Bunning, R-Ky., if the taxpayers would get any of their money back from the GSEs, DeMarco said he could not see that happening any time soon.