As Congress and the Obama administration submit one reform bill after another there seems to be one area that has received little attention. There seems to be hesitation coming from Congress and the current Administration when it comes to dealing with Fannie Mae and Freddie Mac. Fannie and Freddie have been under the Federal Government’s Conservatorship since 2008, and it appears that trend will continue with no end in sight.
Treasury Secretary Timothy Geithner has admitted that dealing with the country’s largest mortgage holders will not be an easy task. However, Mr. Geithner has assembled a team to assist him in his herculean task of what to do with the companies. Individuals that have been invited to participate in Mr. Geithner’s panel include; academic experts, consumer and community experts, and industry experts. In addition Mr. Geithner has been in contact with several members from Congress who have set up separate review panels.
Fannie Mae and Freddie Mac have been considered government sponsored enterprises (GSE’s) for decades. Prior to the Clinton Administration GSE’s were required to submit any new debt accumulations to the Treasury department for approval. The Clinton Administration found this practice burdensome on the Treasury Department and changed the charters for GSE’s. Left to their own devices Fannie and Freddie become bloated with debt and this is what caused them to eventually be taken into conservatorship.
Market financial insiders believe that if the Obama Administration is serious about devising a plan to deal with the two behemoths it should reinstate the debt approval process that was in place prior to the Clinton Administration. Economists agree that the plan should also include a debt step down program that would reduce the two company’s debt by 50% by 2015 and realize a debt free balance sheet by 2018. Opponents of this plan say that trying to send 10 trillion in mortgage securities back to the private sector would be an insurmountable task. Additionally, there are concerns that private security holders would not have the benefit of borrowing money as cheaply as the GSE. Other within the industry are hoping for a happy medium.
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