Fannie Mae and Freddie Mac to be Phased Out by Treasury Department Plan

A Treasury Department plan, set for release later this week, will detail the fate of the mortgage backers Fannie Mae and Freddie Mac. Three options will be presented, but all paths lead towards the dissolution of the ailing giants, which have received $150 billion dollars of federal aid since being placed under government conservatorship in 2008.

Anonymous reports, made by officials involved in the drafting process, have detailed some of the finer points of the strategy. They have refused to go on the record, citing the impermanent nature of the plan, and that it could likely change before being presented to Congress. Despite their caution, the details have offered a clear picture of the proposal.

The deconstruction of these failed GSEs is expected to take years; a rapid unloading off their portfolios could rattle the fragile housing market. The Treasury Department will present steps to gradually reduce their assets. Some of these steps include putting a cap on the size of loans they can ensure, and raising the fees they charge banks to guarantee mortgages. Raising these fees would make private mortgage backers more competitive.

The disbanding of Fannie and Freddie might be stealing the headlines, but the core of the plan centers on defining the government’s role in the secondary mortgage market. Two of the options allow for continued government involvement, while the third would completely remove its influence. Of the options that permit continued government participation, one would resemble the current system; the other would allow the government to intercede in emergency situations, standing in as a last option, when no other backers could be found.

By offering these multiple options, which pander to different segments of the political spectrum, the Obama administration is attempting to spark a conversation in Congress. They’re not trying to force an immediate response. They want this conversation to unfold naturally, to linger, and stand as a reminder to the American people. They want nervous constituents to know they’re dealing with the problem.

While the debate rages, Fannie and Freddie will be picked apart, their portfolios divvied up between different companies. The government needs to carve hunks off these bleeding corpses, and will attempt to persuade private companies to take on the weight. If the government can manage to thin the holdings of Fannie and Freddie, the size of the lingering crisis will also diminish.

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