The U.S. Treasury has put Congress on the spot over the future of housing finance. On Friday Team Geithner unveiled some bold moves to speed up winding down Fannie Mae and Freddie Mac. Now it’s up to the nation’s lawmakers to figure out what will replace the troublesome twins.
Treasury is ending the onerous 10 percent annual dividend the two mortgage agencies have to pay on the $188 billion they borrowed from taxpayers. That payout had created a bizarre feedback loop which forced them, until recently, to borrow even more money from the Treasury to pay their annual tithe.
Instead, the companies will hand over all their profit to Uncle Sam. At present, that means extra cash for the nation’s coffers: both earned more than what they owed for the dividend in the second quarter but kept the extra. The new agreement also removes the temptation for the two lenders to use any unreturned profit to grow their business or overpay their staff.
Treasury has also ordered the agencies to shrink their $1.3 trillion investment portfolios by 15 percent annually, up from 10 percent. That means they should hit the $250 billion target by 2018, four years early. Freddie already slimmed its portfolio at the new rate over the past year.
This still leaves the dilemma of how to reform the dysfunctional U.S. housing finance system. The Obama administration put forth some suggestions over a year ago, but lawmakers have done little since. Even the most crucial of questions remains unanswered: should the government guarantee home loans at all?
It must be tempting to do nothing: Fannie’s and Freddie’s earnings go straight into the general fund for a cash-strapped Congress to spend. But just letting the agencies shrink is not an answer. They account for more than 60 percent of all home loans made in the past few years. Banks do not have the balance-sheet capacity to fill the gap and investors prefer buying federally guaranteed mortgages.
Saying goodbye to potential revenue is never easy. It is especially difficult in the middle of a budget war. But keeping the Franken-Frannie monster alive is no solution.