Are We Nearing the End of Fannie and Freddie?

Meanwhile, the House Finance Services Committee, led by Rep. Jeb Hensarling (R-Texas), has produced its own bill that would also wind down Fannie and Freddie over five years. The bill would mostly privatize the mortgage finance market, leaving the Federal Housing Administration (FHA) and other government housing agencies to provide loans for low-income and first-time homebuyers.

Hensarling said during a speech at the George W. Bush Presidential Center in Dallas the first step to housing finance reform is to permanently move away from a cycle of “boom, bust, and bailout.”

He praised the growing number of ideas for housing finance reform, but said he remains skeptical of any approach that does not end the government guarantee in the secondary mortgage market.

"If, at the end of the day, taxpayers are still on the hook, then I fear all you’ve done is put Fannie and Freddie in the federal witness protection program, given them cosmetic surgery and a new identity, and released them on an unsuspecting public," Hensarling said.

The president said that any measure he signed into law should maintain “fair and simple” mortgage products like the 30-year fixed mortgage rate.

“That’s something families should be able to rely on when they’re making the most important purchase of their lives,” he said.

A recent rise in housing prices has helped the two companies post record profits. This has gotten the attention of those calling for reform.

Fannie posted a record $17.2 billion profit for the January-March period after Freddie posted a record $11 billion profit for last year. The companies paid the government $132 billion in dividends on the bailout money and announced their plans to make additional payments totaling $14.6 billion next month. Under the terms of the bailout agreement, Fannie and Freddie are required to pay quarterly dividends to the U.S. government equal to their net worth in excess of $3 billion.

Those payments are helping make this year’s federal budget deficit the smallest since 2009, according to the Congressional Budget Office.

Last year, the Federal Housing Finance Agency (FHFA) began work on accounting changes that require the two mortgage finance firms to charge off estimated losses on loans delinquent at least 180 days. Currently, the firms take those charges when the loans complete foreclosure.

According to a report from the FHFA’s inspector general made public last week, the two GSEs have been avoiding billions of dollars in potential long-term losses by delaying a requirement that they write off more of the delinquent mortgages they carry.

But as the Wall Street Journal notes, because the two mortgage finance firms are already reserving for losses, the policy change would not necessarily change the profit or loss experienced by the companies. Instead, it would change the timing by which Fannie and Freddie account for losses on loans.

The report said that the FHFA’s timeframe for the mortgage finance companies to delay implementation of the new accounting rules was “inordinately long.” The FHFA has given Fannie and Freddie until January 2015 to comply with the new accounting procedures. Nevertheless, the FHFA’s inspector general recommended that the new accounting procedures should be enacted much sooner.