GAO Reports On GSE Makeover

Posted by Orb Staff on September 11, 2009 No Comments
Categories : Residential Mortgage

According to the Government Accountability Office's (GAO) analysis of Fannie Mae and Freddie Mac, the government-sponsored enterprises' (GSEs') ‘capacity to support housing finance during periods of economic stress has not been established, and they only have been able to do so during the current recession with substantial financial assistance from Treasury and the Federal Reserve.’

The GAO says Congress has essentially three options for Fannie and Freddie: reconstitute them as for-profit corporations with government sponsorship, establish them as government corporations or agencies, or privatize or terminate them.

If turned into for-profit corporations, additional restrictions would be needed, the GAO advises. The GSEs' mortgage portfolios, for example, would need to be eliminated or reduced. Other possible restrictions could include establishing executive compensation limits or converting the GSEs from shareholder-owned entities to associations owned by lenders.

If Fannie and Freddie were converted into government agencies, the GSEs would focus on purchasing qualifying mortgages and issuing mortgage-backed securities, but would eliminate their mortgage portfolios. As the GAO envisions this option, the Federal Housing Administration could "assume additional responsibilities for promoting homeownership for targeted groups."

Privatizing or terminating the GSEs would disperse lending and risk management throughout the private sectors. "Some proposals involve the establishment of a federal mortgage insurer to help protect mortgage lenders against catastrophic mortgage losses," the office says in its 73-page report.

SOURCE: Government Accountability Office

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