Do Fannie Mae and Freddie Mac have a future?

When the economy collapsed during the financial crisis of 2007-2009, the U.S. government was required to bail out the housing market to the tune of $187.5 billion. Many in Congress vowed that never again would the American taxpayer be put on the hook for such a tremendous sum, and it has been working to put in place the last piece of the legislative puzzle to address the regulatory elements that helped contribute to the financial crisis.

Since then, there have been banking reforms and changes on Wall Street, but the delicate process of dismantling Fannie Mae and Freddie Mac has required a balance between the desires of Republicans who wish to remove all government supports and Democrats who want to assure the American dream of owning a home remains in place.

Progress (or not) in Congress

After months of working to bridge the partisan divide (as well as seeking the cooperation of the White House), Senate Banking Committee Members Tim Johnson (D-SD) and Mike Crapo (R-Idaho) have announced that they will soon present a bill in committee that will dissolve the two government-owned mortgage giants. According to this plan, private investors would pay the first 10 percent of any loss before government support would kick in, notes the wire service Reuters. According to the report, Republican Sen. Mike Crapo of Idaho said, “This agreement moves us closer to ending the…status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital.”

As yet, however, the specific plan has not been released, and some analysts have suggested that Liberal Senators could bring the whole plan down before it leaves committee. According to the Wall Street Journal, Democratic Senator Charles Schumer noted: “If ever there was a bill where the devil was in the details, this is it. We’re awaiting those details.”

Also, this does not address what is likely to happen to the legislation, even if it makes it past the Liberals and out of the Senate, where it is likely to meet immediate opposition from House Republicans, who have already put forward their own plan.

Where does that leave investors?

Ironically, this change in the status of the mortgage behemoths Fannie Mae (FNMA) and Freddie Mac (FMCC) comes just as these companies are starting to show a profit once again. According to the Wall Street Journal, the two companies sent $185 billion to the Treasury Department so far and could send another $181.5 billion over the next 10 years.

Dissolution of the companies also raises questions about what happens to investors holding those stocks. To date, there’s been no mention of private shareholders including big institutional investors, and there are already lawsuits on the books over the government’s decision to have all profits flow back into the Treasury, which has prevented the firms from recapitalizing.

Sea change in the mortgage business

The biggest issues, however, lie in the fundamental principles surrounding the way forward. Namely that the real estate industry is demanding the government provide a guarantee so that broad access to the 30-year fixed mortgage will be preserved (particularly for first-time home buyers), while Conservatives in Congress are demanding that any government guarantee in the secondary mortgage market be eliminated. Instead, many see the way forward for housing as one that looks more like the FDIC with banks.

Where things will end up is anyone’s guess at this point in the legislative process. About the only thing that seems certain is that Fannie Mae’s and Freddie Mac’s days are numbered.