Possible Solutions To Housing Mess

PROPPED UP Fannie Mae is keeping housing afloat. Uncle Sam implicitly supports Fannie Mae. That's the problem.

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The mortgage debacle has provided a lot of fodder for the presidential-campaign trail: bereft bankers, preying brokers, and sad, sad tales of hardworking families losing their homes. All the candidates have had something to say about the crisis, whether it’s Hillary Clinton's call for a freeze on foreclosures, Barack Obama's plan for extending the Federal Housing Administration's reach, or John McCain's vaguer comments that he might approve of government intervention. But there's another part of this mess—a scarier one—that the candidates aren't discussing.

It has to do with Fannie Mae, the quasi-governmental corporation that dominates the mortgage-backed-securities market. An odd company with a funny name doesn't exactly make for gripping campaign rhetoric. But there are a couple of things you should know about this one: First, with more than $800 billion in assets, Fannie Mae backs one out of five mortgages in the United States. And second, if it were to collapse, it would make the current housing woes seem minuscule. (Read more about the history of Fannie Mae.)

A collapse is highly unlikely, but it's no longer inconceivable. Even though Fannie Mae never dabbled much in subprime loans, its stock fell more than 40 percent last year as it took huge write-downs and slashed its dividend. Once seemingly immune from economic turbulence, Fannie Mae has been made vulnerable by the same housing typhoon that has buffeted other venerable institutions.

Fannie Mae, though, is a corporation that the next president of the United States can actually do something about. Five out of 18 Fannie board members are presidential appointees. A new president needs to have ideas to expand Fannie's authority, not only in the short run to help with the current housing mess but also to deal with the long-term implications of what a vulnerable Fannie means for taxpayers.

It's worth stepping back here and looking at Fannie Mae's controversial history. Fannie is what's known in Beltway parlance as a G.S.E., or government-sponsored enterprise, meaning that it's not fully in the private sector even though it's listed on the New York Stock Exchange and its website ends in a .com and not a .gov. All those companies with grandmotherly-sounding names like Fannie Mae and Freddie Mac are G.S.E.'s. Fannie Mae was created during the Depression to keep money flowing into the housing market. Originally, it was a government agency whose purpose was to buy mortgages from banks and, in so doing, provide money for them to make more loans. It packaged those mortgages into securities and sold them, just as it does today.

In 1968, Fannie Mae became a private corporation—but here's the rub—with government ties. Its charter was congressionally approved. Critics charge that while Fannie may have been a good idea in the '30s or even in the post-W.W. II years, it has outlived its usefulness and become like the Rural Electrification Administration, which lasted until 1994, long after it was hard to find a farmer without a television. These critics maintain that Fannie should be privatized like other companies that sell mortgage-backed securities.

As a G.S.E., Fannie Mae still has all kinds of privileges that other firms can only dream about. Under its charter, the company pays no state or local income taxes. It is exempt from registering its securities with the Securities and Exchange Commission, although it chose to do so voluntarily six years ago. Above all, it is perceived as having its solvency guaranteed by the federal government.

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