Five Years Later, Fannie Mae, Freddie Mac Remain Unfinished Business

source: Wall Street Journal

Fixing the Mortgage Giants Remains the Largest Single Piece of Unfinished Business From the Financial Crisis

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Highlights:

  1. Some critics warn that the suggested replacements gloss over the private sector's role in producing lots of shoddy mortgages. "All of the proposals we're seeing have one thing in common: They would essentially give greater control over the market to the biggest banks that were key participants in the bubble," said Joshua Rosner, managing director of research firm Graham Fisher & Co. and a longtime critic of Fannie and Freddie before their collapse.

  2. Fannie Mae Chief Executive Timothy Mayopoulos is prodding Washington to make up its mind. He says he is concerned that continued calls for liquidating the company could send his best employees for the exits. They "have families to feed," he said in a May speech to officials from the nation's biggest banks.

  3. Mr. Mayopoulos didn't endorse a particular outcome in his May speech. But he reminded the bankers that 30-year, fixed-rate mortgages weren't a "naturally occurring phenomenon in financial markets." And there was "limited evidence," he said, that private capital was ready to return in large scale.

    "We fully appreciate that Fannie Mae should play a smaller role in a properly functioning market," he added, "and we are working to make that happen."

  4. Small banks worry that without the firms, they would have to sell more of their loans to megabanks like Wells Fargo & Co. that would turn around and sell other services such as checking accounts to those borrowers. "I would be handing my clients to them on a silver platter," said Mr. Sorrentino of ConnectOne Bank.
  5. Hedge funds and institutional investors that have bought Fannie and Freddie shares represent another unlikely ally. They say that rather than plowing the companies under, the government should instead place new curbs on their activities, subject them to higher capital requirements, and spin them off as private firms.

    "It seems like the lawmakers are hellbent on waging this sort of Don Quixote kind of battle against demons that are no longer there," said Michael Kao, chief executive of Akanthos Capital Management in Woodland Hills, Calif., which has invested in both companies since before their collapse.

  6. All of the alternatives being proposed in Washington "simply won't work," says Bruce Berkowitz, chief investment officer of Miami-based Fairholme Capital Management, which sued the Treasury in July to challenge the terms of the government's bailout. The lawsuit alleges that the Treasury is illegally expropriating the company's profits. A Treasury Department spokesman said, "We fully believe our actions have been lawful and appropriate."

  7. In a June letter to Treasury Secretary Jacob Lew, Rep. Michael Capuano (D., Mass.) called the current bailout terms "outrageous usury" and introduced a bill that would relax them, making it more likely that Fannie and Freddie could one day exit government control.

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