Bipartisan report says Fannie and Freddie should be eliminated
The nation’s housing-finance system should be overhauled, increasing the private sector’s role and eventually eliminating government-sponsored mortgage buyers Fannie Mae FNMA and Freddie Mac FMCC , a bipartisan group recommended Monday.
Specifically, the Bipartisan Policy Center, a Washington-based think tank, said a government corporation should replace Fannie and Freddie, but its role would be limited to providing a “catastrophic” guarantee on certain mortgage-backed securities. That is, the government guarantee would come into play only after private entities exhausted their capital.
“The commission’s proposed model includes a continued, but limited, role for the federal government to guarantee MBS to ensure mortgage market liquidity and stability, with a large role for private capital to assume credit risk and shield taxpayers from exposure to credit losses,” according to the report. “Our new model…establishes a clear expectation that private firms suffer the consequences of poor business decisions by losing their capital, with no bailout for private shareholders or bondholders.”
In addition to eliminating Fannie and Freddie within several years, the report recommended narrowing the role of the Federal Housing Administration, a mortgage insurer, by reducing loan limits. With its relatively low down-payment requirements, the FHA helps first-time homeowners and lower- and moderate-income borrowers obtain credit. The agency also plays an important countercyclical role, continuing to provide financial support to the housing market during times of economic stress.