What To Do About Fannie And Freddie

The potential half a trillion cost to keep Fannie and Freddie alive has led to questions about whether the government-sponsored-enterprises should be replaced. The government's controversial agreement to absorb unlimited losses for the next three years from the mortgage giants could add to the unsustainable budget deficit. See the following post from The Mess That Greenspan Made for more on this.

Wow. Elected officials are really getting carried away in their response to the loss of Ted Kennedy's seat in Massachusetts. There's reform in the air all over the nation's capital, Bloomberg now reporting that Rep. Barney Frank (D-MA) is recommending that wards of the state Fannie Mae and Freddie Mac should be abolished

“The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said at a hearing in Washington today. “That’s the approach, rather than a piecemeal one.”

The companies, the largest sources of money for U.S. home loans, were seized by regulators almost 17 months ago because of their risk of failing and have since survived on $110.6 billion in taxpayer-funded aid.

Wasn't it Barney Frank who said a couple years back that the GSEs needed to do more to help the housing market recover (on a temporary basis).

Earlier today, a story in the Wall Street Journal indicated that the Government Accounting Office wants to combine Fannie and Freddie's books with the government's books, a move that would cause U.S. deficits and the national debt to rise - maybe a lot.

The U.S. government's move to deepen its ties to mortgage-finance giants Fannie Mae and Freddie Mac by agreeing to absorb unlimited losses for the next three years is igniting a debate over whether it should bring the business operations of the companies onto its books.

A decision on how the government treats Fannie and Freddie could have broader political implications. So far, the White House has resisted calls by Republicans to bring Fannie's and Freddie's obligations onto the government's books, a move that could boost the federal deficit by tens of billions of dollars.

Recent estimates have put overall losses at Fannie and Freddie at almost a half a trillion dollars. Can the U.S. government absorb all those losses?

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.