Saturday, January 23, 2010

Frank to Recommend Replacing Fannie Mae, Freddie Mac

By Dawn Kopecki and Alison Vekshin Bloomberg January 22, 2010

Representative Barney Frank, whose committee oversees Fannie Mae and Freddie Mac, said he will push to do away with the companies in favor of a different model for U.S. mortgage financing.

“The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said at a hearing in Washington today. “That’s the approach, rather than a piecemeal one.”

The companies, the largest sources of money for U.S. home loans, were seized by regulators almost 17 months ago because of their risk of failing and have since survived on $110.6 billion in taxpayer-funded aid. Frank said Congress also needs to figure out what to do with the remaining shareholders in Fannie Mae and Freddie Mac as well as investors in the companies’ $5.4 trillion in mortgage bonds and $1.7 trillion in unsecured corporate debt.

“That will be one of the things we will be talking about,” Frank told reporters after the hearing. “The stockholders were of course already pretty much beaten up.”

The U.S. Treasury Department took an 80 percent equity stake in each company as part of the government’s September 2008 takeover, which wiped out the majority of common and preferred share values. Fannie Mae common shares, which peaked at $87.81 in December 2000, fell today 8 cents, or 7.5 percent, to 99 cents in regular New York Stock Exchange composite trading. Freddie Mac, which reached an all- time high of $73.70 in December 2004, dropped 14 cents, or 11 percent, to $1.17.

Housing Finance

Washington-based Fannie Mae, which dates back to the 1930s, and McLean, Virginia-based Freddie Mac, started in 1970, were chartered by the government primarily to lower the cost of homeownership. They buy mortgages from lenders, freeing up cash at banks to make more loans. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.

The companies now own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made last year.

Congress hasn’t made any decisions on how to restructure the U.S. home-loan market and will hold hearings before proposing any change, Frank said.

Market Function

“We’re going to look at the whole question of housing finance,” Frank said. “Sorting out the function of promoting liquidity in the market, and also the secondary market in general but then also doing some kind of subsidy for affordability.”

“I don’t know anybody who thinks Fannie and Freddie should continue,” he said.

Mortgage investors “shrugged off the news” today, said Nicholas Strand, a mortgage-bond analyst at Barclays Capital in New York. As Congress begins debating the issue in earnest this year, he said “you might see some concern by mortgage investors reflected in the pricing, but you’re not seeing that today.”

Fannie Mae and Freddie Mac have been run for more than 40 years as shareholder-owned companies that also have a federally chartered mission to promote the housing market. Those dual mandates have collided and contributed to the companies’ failure, Federal Deposit Insurance Corp. Chairman Sheila Bair said in a December interview.

‘Cold, Hard Look’

Treasury Secretary Timothy F. Geithner said in an interview yesterday that he doesn’t think Congress will be able to pass legislation restructuring the companies until next year.

“We are committed to propose a set of detailed reforms beginning this year,” Geithner said in an interview on “PBS NewsHour.” “I don’t think we’re going to be able to legislate that until that process can start until next year, because it’s just a complicated thing to get right.”

“But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country,” he said in the interview.

Fannie Mae has posted $120.5 billion in net losses in the nine quarters ended in September and requested $59.9 billion in Treasury aid to remain solvent. Freddie Mac has lost $67.9 billion and sought $50.7 billion in taxpayer-funded aid.

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