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May 2010
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Suggestions for Fannie Mac Mortgage Reform

Regulatory reform in the mortgage industry is inevitable. The mortgage blogs have been buzzing this week with talks of Fannie Mae and Freddie Mac merging together in an effort to salvage these failing government companies that own 97% of all mortgage notes in America. Even with 30-year fixed rate mortgage programs below 5%, we can’t fix the mortgage mess simply by inducing another refinance boom.

The new Fannie Mac should no longer target low and moderate-income individuals since that replicates FHA’s function. On the path to economic independence, Congress should form a Resolution Trust Corporation type of entity to acquire the new Fannie Mac’s tainted assets. The RTC-type company would dispose of bad credit home loans and real estate acquired through foreclosure. The original RTC was established in 1989 to mop up the assets of failed savings and loan associations. The late Bill Seidman headed it up. He was previously chairman of the Federal Deposit Insurance Corporation under President George H.W. Bush. He adroitly disposed of billions of dollars of assets and returned the proceeds to the Treasury.

The new Fannie Mac will inherit a massive one-to-four unit, home-lending division. That is where most of the tainted assets are. It will also acquire the smaller, multifamily division. Its delinquencies and defaults are more manageable. The skills necessary to underwrite, securitize and service multifamily loans have little in common with mortgage lending. As a result, the new Fannie Mac should spin off the multifamily division into a new company. One company to dispose of tainted assets; another for home lending and a third to make multifamily loans is a rational approach to shrinking the GSEs and returning billions to the Treasury.

The Republican’s GSE amendment calls for repealing Freddie Mac’s and Fannie Mae’s affordable-housing mandate, requiring the companies to shrink their mortgage portfolios, lowering their loan limits and increasing down-payments for home loans. It is unrealistic for that to happen with the GSEs in their present form and while the economic recovery is weak. But the time is right to merge Fannie Mae and Freddie Mac and form three separate companies. That is the best way to lead the GSEs out of federal conservatorship and repay the taxpayers.



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