Some politicians remain stuck on the idea that the U.S. housing market needs some type of backstop, or functioning government-sponsored enterprise, to have a viable mortgage finance system.
But two industry veterans — former FDIC chairman William Isaac and Richard Kovacevich, a former chair for Wells Fargo (WFC) — composed an article for American Banker, arguing it’s time to just liquidate Fannie Mae and Freddie Mac, eliminating any type of government backstop in mortgage finance.
The pair wrote:
"Without these government guarantees, the subprime bubble and the resulting financial crisis would not have happened. Bank regulators and industry experts warned Congress for decades about Fannie and Freddie and their increasingly large and risky portfolios, but Congress failed to heed the warnings.
The solution now is straightforward: abolish the public/private hybrid of Fannie and Freddie, sell or liquidate their existing business, and privatize the mortgage market."
As to how they would this, Kovacevich and Isaac write:
"The solution now is straightforward: abolish the public/private hybrid of Fannie and Freddie, sell or liquidate their existing business, and privatize the mortgage market. This can be done in an orderly way in a few easy steps. Fannie's and Freddie's portfolios of mortgages should be sold at a rate of about $75 billion a year until they reach zero. The $625,000 size limit on new mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 per year, so that Fannie and Freddie would be out of the mortgage guarantee business within six years. The liability for any outstanding guarantees should be managed by the conservatorship of Fannie and Freddie until they run off or are sold.
If the government still wants to be in the mortgage business for low-income families or minorities, the liabilities should be on budget and transparent. The Federal Housing Administration can fulfill this mission.
Some speculate that without Fannie and Freddie mortgage rates would skyrocket and the 30-year, fixed-rate mortgage would be a thing of the past. We disagree."