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Washington Post: Recapitalizing Fannie, Freddie is a ‘recipe for housing disaster’

WaPo editorial board weighs in on GSE reform

Count the Washington Post’s editorial board among those who think ending the government’s conservatorship of Fannie Mae and Freddie Mac by allowing them to rebuild their capital reserves is a bad idea.

In fact, in an editorial published Sunday, the Washington Post Editorial Board calls the recapitalization and release of Fannie and Freddie a “recipe for housing disaster.”

Over the last few months, efforts to push for the “recap and release” of Fannie and Freddie have been undertaken by various groups, including what the WaPo’s editorial board calls the “strange bedfellows” of Wall Street hedge funds and affordable housing advocates.

The Washington Post editorial touches on the recap and release arguments put forth in a guest blog on HousingWire by John Taylor, the CEO of the National Community Reinvestment Coalition, as well as the argument against recap and release authored by Barry Zigas, the director of housing policy at Consumer Federation of America.

From the Washington Post:

These unlikely allies want to end government control of the two entities and put shareholders back in charge, as if their collapse and federal bailout in 2008 had never happened. The hedgies covet the multibillion-dollar windfall that would accrue to them if the Fannie-Freddie shares they bought for pennies after the bailout suddenly became marketable again. Housing advocates, more admirably but, in policy terms, no less misguidedly, want Fannie and Freddie back as sources of support for federal housing programs.

Amid all the harrumphing about shareholder property rights and helping the poor, you could almost forget that what this coalition seeks is essentially the same cockeyed enterprise structure — privatized profits, socialized risks — that helped set Fannie and Freddie on the road to disaster in the first place.

But in the WaPo Editorial Board’s opinion, that disaster will be avoided thanks to the inclusion of a provision in the federal spending bill that prohibits the Administration – be it the Obama Administration or the next President’s Administration – from selling off its stake in Fannie and Freddie without the approval of Congress, for at least two years.

In the Editorial Board’s mind, this move buys the government two years to figure out a new plan for Fannie and Freddie.

Again from the Washington Post:

To be sure, this perpetuates an unsatisfactory situation in which what was supposed to be temporary direct government supervision of mortgage finance has taken on a decidedly permanent cast. However, the specter of recap and release has been banished, not only in Congress but also, probably, in the courts; judges have so far not looked very favorably on hedge-fund lawsuits on the issue, and they are less likely to do so now that Congress has so clearly expressed its will. Indeed, the Obama administration already is on record opposing recap and release. Two years should be more than enough time to prepare legislation that does the right thing with Fannie and Freddie — that is, replace them with a new system of mortgage finance relying on the private sector to handle more of the risk while directly subsidizing legitimate low-income housing as needed.

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