Even Fannie Mae's CEO Thinks the Company Is Too Big

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By Deborah Solomon

When the head of Fannie Mae says his company controls too much of the mortgage market, it's worth paying attention.

Fannie Mae Chief Executive Officer Timothy Mayopoulos said the government-controlled mortgage giant has become just that. "We recognize the amount of business we're doing today is disproportionate … [Fannie] shouldn't be funding this much," Mayopoulos said at a Bloomberg Government breakfast this morning.

Fannie is backing about 50 percent of all mortgages and, in combination with Freddie Mac and the Federal Housing Administration, the government now owns or guarantees about 95 percent of the mortgage market. "That's not healthy" or sustainable, Mayopoulos said. (It is, however, profitable: Mayopoulos said Fannie's $9.7 billion net income for the first three quarters of 2012 is more than the company has earned in its history. Don't worry -- the cash is going straight back to the U.S. Treasury Department).

The government's outsized mortgage presence is likely to persist absent a housing finance overhaul that clarifies what role, if any, Fannie, Freddie and the U.S. government will play in the mortgage market.

Housing finance reform will never be politically easy, but a series of recent events demonstrates that it's time for Congress and President Barack Obama's administration to begin taking concrete steps to overhaul the market.

This week's $11.7 billion settlement between Bank of America Corp. and Fannie over residential loans that went sour largely resolves the bulk of so-called putbacks in which Fannie has been engaging. To claw back money for taxpayers, Fannie and Freddie have both demanded lenders buy back loans that suffered from questionable underwriting and other flaws.

Mayopoulos said the rate of repurchases for loans originated between 2005 and 2008 is about 3 percent and that Bank of America "represented a substantial amount" of those mortgages. The bulk of the loans were actually created by Countrywide Financial Inc., which Bank of America acquired in 2008. Fannie, along with the U.S. government, has claimed the loans, which led to record defaults, were based on flawed data about the homes and borrowers.

Mayopoulos said the settlement allows Fannie to stop diverting so many resources to combing through legacy loans to identify flaws and to focus instead on ensuring that Fannie-backed loans being originated today are quality loans.

That, along with a new "qualified mortgage" rule expected from the Consumer Financial Protection Bureau this week, will create more certainty about underwriting standards for mortgages and, presumably, give banks more peace of mind about issuing loans.

Still, the private mortgage market isn't likely to kick back into gear until the roles of Fannie and Freddie are spelled out and clarity is given about whether the U.S. will provide any type of mortgage guarantee.

In absence of any tangible reform efforts, Fannie and its overseer -- the Federal Housing Finance Agency -- are exploring how to shed some of the risk the company currently assumes in guaranteeing loans. One idea Mayopoulos said they may consider is providing less than a 100 percent guarantee, so that the company originating the loan assumes some risk.

Fannie and Freddie have been crucial linchpins during the housing crisis, providing mortgage credit that otherwise would have been absent and girding the economy against an even worse fate. Their role has juiced the market to such a degree that housing is now a bright spot in the economy, with home prices rising and foreclosures beginning to stabilize.

That, along with new regulatory efforts and legal resolutions, should provide impetus to lawmakers to begin the painful but necessary task of determining what the U.S. mortgage market will look like in the future.

If the head of Fannie Mae thinks his company is providing an unhealthy level of financing, Congress ought to do something about it.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Jan/08/2013 16:37 GMT