Policymaker's call for dissolution of Fannie and Freddie falls short

New Jersey Republican Congressman Scott Garrett recently proposed a bill that calls for a private alternative to government-sponsored entities Fannie Mae and Freddie Mac in the mortgage lending industry. The Private Mortgage Investment Act has gained support from both parties, but the bill does not explain what private entity would promote housing market stability, financing multifamily housing and perpetuate fair housing as the government-sponsored entities do.

The Huffington Post reported that the act calls for the abolition of the risk-retention and Qualified Residential Mortgage provisions in the Dodd-Frank Consumer Protection Act. Risk retention encourages lenders to originate higher-quality loans as they are affected by the future performance of the loan, and eliminating risk retention could take away the incentive for banks to practice prudent underwriting.

The source reported the proposed act would prohibit regulators from mandating principal reductions, which will hurt the millions of homeowners with negative equity and underwater mortgages. Principal reductions are important to help underwater homeowners avoid default.

However, one reason why the government-sponsored entities have come under fire recently is due to their financial troubles that have burdened taxpayers. Fannie Mae and Freddie Mac have already accounted for more than $50 billion in bailout money, and the FHA is expected experience a $50 billion loss in the next year, The Hill reported. In addition, 10 executives at Fannie Mae and Freddie Mac were paid nearly $13 million in bonuses in 2010, as the government-sponsored entities were reporting massive losses.

More News