The Obama Administration has expressed support for a bipartisan bill to wind down government-controlled mortgage companies, Fannie Mae and Freddie Mac. The proposed bill will eliminate or greatly reduce the size of these companies while retaining the federal government’s role in backing mortgage lending. However, lawmakers seem unlikely to produce a bill by the end of the year as planned.
While Republicans have been advocating for an eventual shut-down of Fannie and Freddie and a complete turn-over of these companies to the private sector, Democrats fear that such transition would cause less affluent borrowers to lose access to mortgages in the absence of governmental safeguards that ensure the availability of credit to all. However, reaching a deal continues to look promising since both sides seem to concede that a federal backstop is necessary to keep the cost of mortgage financing low and access to credit widely available.
Currently, Fannie Mae and Freddie Mac play key roles by repackaging loans from banks into mortgage-backed securities for investors. Although the recent economic crisis threatened their solvency and led to their $188 billion bailout, Fannie and Freddie still back nearly half of the $10 trillion in outstanding mortgages. Under the proposed bipartisan bill, as Fannie and Freddie get replaced by a new government insurer, the government’s assistance will only come into play after private creditors, required to take at least 10 percent of the first losses on mortgage debts, have taken a hit.
The leaders of the Senate Banking Committee are still working to have a draft bill ready for the panel’s consideration in 2014. In the meantime, Fannie Mae and Freddie Mac have experienced a surge in their stock prices due to a major investment from activist investor, Bill Ackman’s Pershing Square hedge fund. Pershing Square invested half a billion dollars to acquire stakes of nearly 10 percent each in Fannie Mae and Freddie Mac. In addition, Fairholme Capital Management announced this week that they, along with other investors, were willing to buy and recapitalize these two government-controlled companies. As a result, on Friday, shares of Fannie Mae rose 7.84 percent to $3.30 and Freddie Mac closed at $3.08, a jump of 6.21 percent.
However, any effort to recapitalize Fannie Mae and Freddie Mac requires congressional approval and these companies cannot break free from government control without action from Congress or the Treasury. A Treasury official remarked on Thursday, “The administration remains committed to reforming the housing-finance sector by responsibly winding down [Fannie and Freddie] and ensuring that any new system preserves broad access to credit for responsible borrowers, strengthens the economy and promotes financial stability.”