Feds settle in as backer of nearly all mortgages
The federal government's role as the backer of most U.S. home loans is becoming entrenched as fiscal issues distract Congress and the White House from a housing-finance overhaul that would shift more risk to private capital, according to lawmakers and analysts.
At the core of such an overhaul is the future of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, the so-called government-sponsored enterprises, or GSEs, that provide market liquidity by buying home loans and bundling them into securities. As they neared collapse in 2008, the companies were placed into federal conservatorship.
Housing-finance reform is "number two or three" on the agenda for Congress, Jim Millstein, the former U.S. Treasury Department chief restructuring officer who now runs advisory firm Millstein & Co., said in an interview.
"The reality is that a now four-year long conservatorship is no longer even threatening to become a nationalization of the mortgage market," Millstein said. "It is becoming the nationalization of the mortgage market."
Together, Fannie Mae, Freddie Mac and the Federal Housing Administration, the government agency that insures about 15 percent of mortgages, either own or guarantee more than 90 percent of home loans in the U.S.
The Obama administration is finishing a proposal to maintain a government safety net for housing finance while allowing private capital to take on the up-front risk. A date for the plan's release hasn't been set. Meanwhile, Republicans and Democrats in Congress are preparing to introduce bills next year to wind down Fannie Mae and Freddie Mac.
"Don't get the idea that we'll see Fannie and Freddie go away some time next year or be reconstituted in a different form," said Clifford Rossi, a former risk manager and managing director at Citigroup Inc. who's now at the University of Maryland's Robert H. Smith School of Business. "There's too much groundwork to be done."
The risk of deep government involvement in backing mortgages was highlighted this month when the FHA said it faces a $16.3 billion shortfall in the value of its insurance fund. The agency is proposing to raise premiums and sell delinquent loans to avoid taking a taxpayer subsidy for the first time in its 78-year history.
"I hope now with this example we'll get bipartisan support for comprehensive reform not only for FHA but for the GSEs as well," Scott Garrett, a Republican from New Jersey who sits on the House Financial Services Committee, said in an interview. "Once again we're proved that government cannot price the risk, government is not better at handling the mortgage market than the private sector."
Even as FHA is facing financial headwinds, Fannie Mae and Freddie Mac have reduced their dependency on government support. After taking $190 billion in Treasury aid, each has now gone two straight quarters without needing additional cash infusions. They've paid a combined $50 billion to Treasury in dividends, which technically don't count as a payoff of the government's stake.
No plan exists for them to emerge from government control, and lawmakers including Garrett say they fear the companies' improved finances could stall momentum to wind them down.