Top Democrats warned Monday that efforts to privatize and drastically shrink mortgage-financing giants Fannie Mae and Freddie Mac would likely face opposition and cautioned against any effort to prejudge solutions for the two firms that were seized by the federal government this weekend.
Senate Banking Chairman Christopher Dodd and House Financial Services Chairman Barney Frank urged restraint over calls to dramatically restructure the two companies, which own or guarantee about half of the $12 trillion home-mortgage market. Federal regulators, led by Treasury Secretary Paulson, placed the two into conservatorship after concerns that they had insufficient capital to weather the continuing downturn in the housing market.
The two firms were chartered by the government but operate as private companies that are publicly traded. Many analysts contend their hybrid structure -- to generate profits for shareholders while at the same time being a government-sponsored enterprise that must comply with mandates to expand affordable housing -- ultimately led to their downfall.
The issue has entered into the presidential race with partisan fault lines emerging. Former CBO Director Douglas Holtz Eakin, a senior adviser for GOP presidential nominee Sen. John McCain of Arizona, said his candidate would pursue legislation, if elected, that would limit the two's ability to borrow, shrink their portfolio size and "privatizes and eliminates their links to the government."
Rep. Tom Price, R-Ga., said he thinks McCain's stance will resonate with voters because the bailout package will include $200 billion in funding to aid the firms. "What I hear is taxpayers [are] fed up they don't see any change in the plan going forward," Price said.
The Democratic presidential nominee, Sen. Barack Obama of Illinois, has taken a more measured approach about the future of the two firms but added that any immediate action should "protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac."
Frank said such immediate calls for privatization or to nationalize the firms were unwise. "McCain has never paid any attention to this issue. I think that anybody who prejudges this now is making a mistake. Find me someone who knew how bad this subprime thing is going to get and the extent to which it is going to reverberate from two years ago and I will listen," he said.
The issue of restructuring the two will be a top issue for the next Congress and administration. Congress in July cleared legislation that gave Treasury expanded powers to make loans to both firms and purchase their stock, but Paulson felt that such action would be insufficient given unease felt by foreign investors who hold more than $1 trillion of GSE long-term debt.
Dodd said the onus would be on those advocating privatization to ensure that there would be an adequate replacement to provide stability for the mortgage market.
"I've been around here [long enough] to know there have been people who have wanted to get rid of them for years. The question is: Is that what's going on here? And if it is, then I think the burden falls on them to describe what they are going to put in its place," Dodd said. "If the argument is that you don't need anything in its place, then you just dealt a very severe blow to the residential mortgage market and home ownership in this country." Dodd said his panel will hold a hearing this week on the bailout and ask Paulson to testify.
Dodd stressed he was not in the tank for Fannie and Freddie, both of which have had influential lobbying and political outreach that protected their interests. Dodd noted that Fannie and Freddie play a crucial role by providing liquidity to the mortgage market.
The Paulson plan would allow the two to temporarily expand their portfolio holdings within the next year from $1.5 trillion to $1.7 trillion to bring stability to the market. But in 2010 they would be required to decrease their holdings by 10 percent annually until it totals a combined $500 billion. "I think that's just a sop to the right," Frank said.
Dodd added that he was more concerned about the types of loans held in the portfolio rather than their size.
This article appears in the September 13, 2008 edition of NJ Daily.