The Center long ago recommended that Fannie Mae and Freddie Mac should be broken up into 20 competing smaller companies. Now it appears that the Obama adminstration is taking our advice. The Obama administration, through its White House's National Economic Council, is considering a preliminary proposal to overhaul of Fannie Mae and Freddie Mac by striping them of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market.The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.The "bad bank" would be a depository for Fannie Mae's and Freddie Mac's toxic assets.
Then the government could create new companies that would attract private investment in support of mortgage finance. Options for the "good banks" include consolidating the firms into one government agency, leaving mortgage finance to private banks or maintaining a hybrid model.
Fannie and Freddie were effectively nationalized in September 2008 amid a market meltdown that revealed much of their holdings to be troubled. The government has since pledged more than $1.5 trillion, including $85 billion in direct aid, to keep the mortgage market working through Fannie Mae and Freddie Mac. The Federal Reserve has bought well over $1 trillion worth of mortgage-related securities and debt from Fannie Mae and Freddie Mac. That further helped to lower interest rates on home loans. The government also has pledged up to $400 billion in direct investments in the firms. (Wash Post, 8/6/09)
Fannie Mae Freddie Mac Bail Out Bill Signed By President Bush
Net Metering Backed Securities
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