Another obstacle to quick action is that if the government were to make it clear, right now, that it wanted Fannie and Freddie's business to shrink, then the rating agencies might downgrade Fannie and Freddie's debt. That would immediately throw the housing market into a tailspin, because Fannie and Freddie would no longer be able to raise money to guarantee new mortgages. In a recent report, Moody's said that even if "political consensus [began] building around a plausible scenario that diminishes [Fannie and Freddie's] importance," the government would have to explicitly guarantee Fannie and Freddie's debt in order to maintain their current triple-A rating. Doing so would add trillions to an already out-of-control national debt.
Given this unappetizing platter of options, the Obama administration and Congress are likely to do nothing. At the Brookings Institution, one questioner asked Geithner how he would answer the charge that "this is never going to happen." Geithner began: "Well, I think that's a good question."
Did I mention that the nation's realtors are dead set against abolishing Fannie and Freddie? A good deal of Fannie and Freddie's much-vaunted political power in the past was due to all their allies in the homeownership mafia, and the housing crisis has not changed that. The American Land Title Association warned the administration and Congress that "any plans to significantly alter or eliminate Fannie Mae and Freddie Mac would have a severe impact on consumers." The National Association of Realtors is running a print ad that says that the notion that "we don't need Fannie Mae & Freddie Mac to provide new mortgage financing" is a "myth."
Will anything happen in the near term? Maybe. The Treasury could restructure its investment in Fannie and Freddie. As it stands, they have no clear path to getting out of hock. Fannie and Freddie have drawn $130 billion from the Treasury and owe a 10 percent dividend on that. Moody's calculates that by the end of 2012 Fannie will have to cough up from $14.7 billion to $23.2 billion a year in dividends. That's far more than it earned even during its glory years. Freddie's situation is similarly bleak. But the Treasury could convert its interest into common shares, and under existing law, split the companies into a so-called "good bank," which held the profitable ongoing business, and a "bad bank," which held the losses. Taxpayers would still be on the hook for the bad bank's losses, but the good bank could begin to recover.
Jaret Seiberg, an analyst with MF Global, has written that a "more stable Fannie and Freddie reduces the need for legislation, which makes it even harder to get lawmakers to act." According to Seiberg "[W]e could end up with a utility-like version of Fannie and Freddie rather than a wholesale legislative overhaul." Their ability to make large profits would be curtailed and they would be tightly regulated.
It's as plausible a prediction of Fannie and Freddie's fate as I've heard. But would better regulation, higher capital standards, and more stringent underwriting standards prevent a replay of their 2008 collapse? For awhile, sure. But if Fannie and Freddie's past behavior is any guide, they would eventually, with the help of the rest of the homeownership mafia, acquire enough lobbying muscle to call the shots. At that point, all bets are off.