Possible Solutions To Housing Mess

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This is where things get tricky today. While Fannie Mae's charter specifically states that it is not backed by the federal government, the markets have long treated the company as though it were. That's in part because Fannie has special borrowing privileges with the Federal Reserve, but it's also because of the company's genesis as an arm of the government. And some believe that Fannie is too big to be allowed to fail. Daniel Mudd, Fannie Mae's C.E.O., has predicted further downturns for the housing market, but he maintains that the company can more than weather the storm. Maybe he's right, but in this turbulent climate, no one can be entirely sure.

So it's important for the next president to consider what the right road for Fannie Mae will be. I think it would be crazy to privatize the company or even tinker with Fannie's charter, which gives it all those special privileges—at least for now. The jumpy housing market needs a Xanax. This is not the moment for giving it more jitters, and rocking Fannie Mae would cause more trouble than it's worth. But at some point when we're past all of this, Congress should cut Fannie Mae loose. It's been done before. Sallie Mae, the student-loan bundler, was privatized in 2004.

Meanwhile, it makes sense to prepare for the unlikely eventuality of a Fannie Mae collapse. I don't think that will happen, but as Peter Wallison, a longtime conservative Fannie Mae critic, has pointed out, something needs to be done about the company's status if it goes all wobbly. It's bad enough that the government would be seen as Fannie Mae's savior. But because of its special status, Fannie Mae is not covered by normal bankruptcy laws, which means that in the event of financial disaster, the Office of Federal Housing Enterprise Oversight, or Ofheo, Fannie's little-known regulator in the Department of Housing and Urban Development, would most likely become its guarantor but not its receiver. The distinction, which would seem to be of interest only to the nerdiest of accountants, is important because, as Wallison points out, a guarantor does not have the same power to shut down a company's operations that a receiver does. That means that a reeling Fannie Mae could keep operating and chalking up even bigger losses, because failing financial enterprises have a tendency to make risky Hail Mary gambits when they're on the verge of collapse.

Legislation is pending that would give Ofheo the power of a receiver and allow it to shut down Fannie Mae in an orderly manner. It'd be good to move this along.

It may seem contradictory, but Fannie, in the meantime, should be given a bigger role in solving the mortgage mess. After an accounting scandal forced Mudd's predecessor, Franklin Raines, out, Ofheo slapped tougher capital restrictions on Fannie, meaning it had to keep more money on hand. So far, Ofheo has refused to budge on altering Fannie's capital requirements, but it should be persuaded to loosen up, at least a bit. If Fannie falls, it won't be the result of some tinkering at the edges, but something that devastates the housing market. In a wise move, the stimulus package passed by Congress back in February includes a provision to allow Fannie Mae to play in the market for jumbo mortgages—those for more than $419,000. In much of the country, of course, that's not enough for a mansion. That buys a condo. Now, thanks to the stimulus package, Fannie Mae can buy or guarantee single-family mortgages of up to $729,750.

The housing crisis managed to sneak up on a lot of smart people. Ask Citigroup's Chuck Prince, or Merrill Lynch's Stan O'Neal, or Ben Bernanke himself, for that matter. Daniel Mudd's smart too. He has wisely tempered Fannie from the days when it ostentatiously hired as many former government officials as it could to wield influence and preserve its special status. But Mudd could do a lot more by setting up a long-term plan to ease Fannie into becoming a normal corporation that no longer depends on a wink and a nod from Uncle Sam. If he doesn't, the next president really should.

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