By Deborah Solomon
After nearly four years of a zombie existence, the U.S. Treasury Department finally pulled the trigger on Fannie Mae and Freddie Mac.
In revising the terms of the companies' bailouts, the Treasury is ensuring the mortgage giants never resume their heady roles as private companies. It's an ironic twist for Fannie and Freddie, which once employed armies of lobbyists to protect their status.
Under the new arrangement, the companies will not be able to keep a single dime of profit they earn -- the money will all flow back to the U.S. Treasury. The move, which also requires Fannie and Freddie to shrink their mortgage portfolios more quickly, is intended to hasten reform of the housing finance market, which is almost completely dependent on the U.S. government.
It's long been assumed that Fannie and Freddie would eventually be put out to pasture. By effectively taking away their ability to recapitalize themselves, Treasury has made that a reality. But what happens next remains an open question.
The administration has floated several options and is said to be leaning toward some type of government guarantee for the mortgage finance system, but no plan has been proposed. While Treasury deserves some credit for at least moving the ball forward, it is also ensuring Fannie and Freddie remain wards of the state until something else takes their place.
This could be financially convenient: Fannie and Freddie both reported second-quarter profits this month -- even after paying dividends to Treasury -- and did not have to draw any assistance from Treasury. If the profits continue, it would give the U.S. a sweet pot of money for Congress to appropriate however it sees fit. The temptation may be too great to resist: Lawmakers already tapped Fannie and Freddie once to help finance a payroll tax cut.
Yet doing nothing ensures the government remains the dominant player in housing finance. Fannie and Freddie, along with the Federal Housing Administration, provide critical grease to the housing market and back 90 percent of home loans. While there are encouraging signs of the housing market's recovery -- such as strengthening home prices -- there are also reasons to worry. Banks continue to sit on large volumes of foreclosed properties, and delinquencies are rising in some areas.
This is one reason why private capital is largely nonexistent. The other reason is the outsized role Fannie and Freddie play and uncertainty about the future of housing finance. Private capital wants to know if there will be incentives to get back into mortgage finance, such as government guarantees for qualified mortgages.
Treasury Secretary Tim Geithner has said the Obama administration would offer more clarity about its plan sometime this year. Granted, Fannie and Freddie are lightning rods, and their futures aren't likely to be resolved quickly. Now that it has turned the firms into true zombies, the administration needs to say what will rise to take their place.
Read more breaking commentary from Bloomberg View at the Ticker.-0- Aug/17/2012 19:02 GMT