The Long and Winding Road to GSE Reform

With the price of the bailout rising and momentum for reform in Washington slowing, Fannie Mae and Freddie Mac remain vital to the functioning of the mortgage and housing markets. A framework for a new system is beginning to take shape, at the same time that analysts are looking to fully and adequately address flaws in the current system.

Mortgage Banking

May 2010

By Robert Stowe England

A giant question mark hangs over the mortgage finance industry. What is the future of Fannie Mae and Freddie Mac? That is part of a larger question. What is the future of mortgage finance?

The two pillars of the mortgage industry that own or guarantee payment on $5 trillion in U.S. mortgages and/or mortgage-backed securities (MBS) failed dramatically at the height of the Panic of 2008 and were placed into conservatorship by the Federal Housing Finance Agency (FHFA).

The significance of the failure of the two government-sponsored enterprises (GSEs) has been difficult to fully capture; but however you describe it, it is epic in scope. The Congressional Budget Office (CBO) has projected that the bailout of Fannie and Freddie added $291 billion to federal outlays in fiscal year 2009 (October 2008-September 2009). CBO predicts another $99 billion in outlays from 2010 to 2019, for a total loss of $380 billion--by far the largest federal rescue ever.

It’s also one for the history books. “It was the biggest failure of housing policy on the planet and throughout all of history,” says Alex Pollock, resident fellow at the American Enterprise Institute (AEI), Washington, D.C. The GSE failures dwarf the next largest spectacular failure, the savings-and-loan (S&L) crisis of the early 1990s, where only $1 trillion in assets were on the line, he says.

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