Critics question proposals to replace Fannie, Freddie

The Obama Administration proposals to replace Fannie Mae and Freddie Mac include one option that essentially continues the old regime but under a new name, some critics told The American Banker.

Option three would have the government sell reinsurance to private mortgage companies that will insure mortgage-backed securities. This makes government the ultimate insurer in a crisis, just as it was in 2007-08.

Lawrence White, an economics professor at New York University’s Stern School of Business, told the American Banker:

“It doesn’t take more than three and half seconds of reading that paragraph to realize that we are talking about another version of Fannie and Freddie,” said Lawrence White, an economics professor at New York University’s Stern School of Business. “Those institutions sound like, smell like, feel like, another set of Fannies and Freddies.”

Option one would theoretically take government entirely out of the mortgage business, and option two would give government a mortgage role only in times of crisis.

As described by the Obama Administration, option three is the only option that would produce mortgage-backed securities acceptable to many lenders as repo collateral in today’s cautious credit environment. But some analysts predict that as time goes by repo lenders are likely to become more comfortable with lower quality collateral, as they did in the years leading up to the 2007-08 crisis, and when trouble comes the government will stand behind it, as it did in 2007-08.