Fannie Mae and Freddie Mac are likely to remain in government conservatorship until at least next year, the Obama administration indicated today in unveiling a sweeping plan to overhaul the financial regulatory system.
The mortgage giants’ “continued stability and strength” is needed during “these difficult financial times,” the administration said in a report outlining proposed changes to the regulatory system.
The proposed changes, which will require congressional approval, would include a new financial services oversight council to identify emerging systemic risks and a new national bank supervisor to oversee all federally chartered banks.
In addition, the plan would eliminate the federal thrift charter and other loopholes that the administration says allowed some depository institutions to avoid bank holding-company regulation by the Federal Reserve.
The plan would also give the Federal Reserve new authority to supervise all firms that might pose a threat to financial stability — even non-banks — and require hedge funds and other private pools of capital to register with the Securities and Exchange Commission. Stronger capital standards would also be imposed on all financial firms.
In introducing its proposal to overhaul the financial regulatory system, the Obama administration said it won’t issue recommendations on the future of Fannie Mae and Freddie Mac until next year.
The Treasury Department and the Department of Housing and Urban Development (HUD) will seek input from the public and other government agencies and report back to Congress next year with recommendations on the future of Fannie, Freddie, and the Federal Home Loan Bank system, collectively known as the government-sponsored entities, or GSEs. The report is expected to be released when the administration issues its 2011 budget proposal next spring.
The Obama administration has identified at least six options for Fannie and Freddie:
• Return them to their previous status as privately owned, government-chartered companies that seek to make a profit for shareholders while pursuing public policy homeownership goals.
• Wind down Fannie and Freddie’s operations and liquidate their assets.
• Incorporate the GSEs’ functions into a federal agency (such as Ginnie Mae, which operates under HUD).
• Operate Fannie and Freddie on a public utility model, with the government regulating their profit margins, setting guarantee fees, and providing explicit backing for their guarantees.
• Converting the GSEs into companies that provide insurance for covered bonds.
• Break Fannie and Freddie up into many smaller companies.
Even after their huge losses prompted the government to place Fannie and Freddie in conservatorship in September, the companies have played a central role in keeping mortgage interest rates down.
The Federal Reserve in November kicked off a program to drive down mortgage rates by buying up to $500 billion in mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae. The program was expanded in March to allow for up to $1.25 trillion in purchases of mortgage-backed securities.
For a time, the program helped drive interest rates on 30-year fixed-rate loans below 5 percent for borrowers with good credit and sizeable down payments, spurring rush by borrowers to refinance. The Mortgage Bankers Association estimated in March that lenders would refinance $1.96 trillion in mortgages this year, up from $765 billion in 2008.
More recently, worries about the government’s growing debt and the long-term prospects for inflation have helped drive mortgage rates back above the 5 percent mark, cooling the demand for refinancings.
With investors still shunning mortgage-backed securities not backed by Fannie, Freddie and Ginnie Mae, the Obama administration says that for now, it will keep Fannie and Freddie under government control (Ginnie Mae, which guarantees payments on mortgage-backed securities backed mostly by the Federal Housing Administration and Department of Veterans Affairs, has always been a government-owned corporation).
Testifying in December before the House Committee on Oversight and Government Reform on the future of Fannie and Freddie, attorney Thomas H. Stanton urged the government to move the companies from conservatorship into full-blown receivership, and use them as “agents of reform” for the mortgage market .
Stanton, a fellow of the Center for the Study of American Government at Johns Hopkins University, said placing the companies in receivership for five years would remove shareholders from the picture, allowing the companies to price mortgage purchases without having to worry about the conflicting goal of restoring the company’s value to shareholders.
Requiring the companies to serve public purposes, instead of a mix of public and private objectives, could help the Obama administration “turn the insolvency of Fannie Mae and Freddie Mac into an opportunity,” Stanton testified.
Others who see Fannie’s and Freddie’s past practices as one of the root causes of the financial meltdown want to see them privatized or abolished.
Columbia Business School professor Charles Calomiris testified that the government should sell off Fannie’s and Freddie’s assets or split them up into many competing businesses with no government guarantees of their debts or liabilities.
Because of their size and implicit government backing, the GSEs played a role in loosening lending standards that went beyond the volume of subprime and alt-A loans they purchased or guaranteed, Calomiris said.