Yesterday, the Financial Times published a summary piece on what's likely to happen next to Fannie Mae and Freddie Mac. The Obama Administration has committed to laying out options in its February, 2010 budget submission. But the folks responsible for producing them may rue this promise made earlier in 2009 when the rest of the Administration's financial modernization package was unveiled.
The government's unprecedented and aggressive support for the mortgage markets hinges almost entirely on the continued role the two companies play in the market. The private securitization market is dead. Recent research from JP Morgan suggests that it will remain that way from some time to come. It’s unclear what demand for their MBS will be if the Fed makes good on its plan to phase out its own $1.25 trillion MBS purchase program next spring, but no one is ready to roll the dice on an new, untested model just yet.
The two companies also are playing a crucial role in the Administration's Making Home Affordable" mortgage modification program. Once restructured, it isn't clear how that capacity could be easily replicated.
The government may have the two companies exactly where it wants them: firmly under government control, and available to be used to further public policy goals without interference from shareholders or private owners.
With many trillions of outstanding MBS under their guarantee, a huge ongoing role in financing affordable apartment homes, and a combined single family market share around 70 percent now, a great deal of the housing market's immediate and near future health seems to ride on the two companies and the market's faith in their guarantees on the securities.
An awful lot hinges on getting this right. Rushing to a solution merely for the sake of having one is not the right choice.
Barry Zigas is housing policy director for the Consumer Federation of America. He also works with other nonprofits and foundations through Zigas and Associates, LLC.