Mortgage giants face new carrot — and stick

Marketplace Contributor Aug 17, 2012

Mortgage giants face new carrot — and stick

Marketplace Contributor Aug 17, 2012

Kai Ryssdal: There’s news of Fannie Mae and Freddie Mac today. About the terms of the bailout they got from the government as the financial crisis descended upon us.

Instead of having to borrow more money from the Treasury just to pay back their original bailout, the two mortgage companies are now simply gonna have to hand over every dime of profit they make. Our senior business correspondent Bob Moon has the details.

Bob Moon: The spin from the Treasury Department was that today’s action will accelerate the Obama administration’s planned “winding down” of the big mortgage-guarantee firms. Fannie and Freddie won’t be required to dig themselves deeper into debt just to pay back the government. And, they’re being ordered to shrink their mortgage holdings four years earlier than planned.

But at Washington’s Center for Economic and Policy Research, Dean Baker calls it a minor adjustment, and says this move really buys the administration some time.

Dean Baker: That’s not to say they’re not planning to wind them down. I’m just saying the steps they’ve taken to date have been pretty small.

University of Maryland professor Phillip Swagel agrees.  

Phillip Swagel: They are taking it so slow, that it’s almost a new definition of slow.

The reason was made clear more than a year ago, when Treasury Secretary Timothy Geithner first proposed moving Fannie and Freddie out of the loan guarantee business.

Timothy Geithner: We want to be careful that that process happens in a way that doesn’t interfere with or impede the process of repairing the housing market.

Professor Swagel says that’s not the only reason Washington is approaching the Fannie-Freddie phase-out cautiously.

Swagel: Inevitably, reform of housing finance probably means higher interest rates on mortgages, and the administration doesn’t want to touch that right now.

Swagel says that means any of the tough decisions that could raise the cost of home loans will almost certainly have to wait until well after the election.

I’m Bob Moon for Marketplace.

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