Economy Watch: Beginning of the End for Fannie and Freddie?

Though lacking in details, the Obama administration has released a plan that calls for the gradual dissolution of Fannie and Freddie. And one consumer index for January turns out optimism about the job market.

By Dees Stribling, Contributing Editor

It’s a radical notion: no more Fannie and no more Freddie. Can it happen? Should it? Is the Obama administration’s plan for the GSEs, released on Friday as a report by the departments of the Treasury and Housing and Urban Development and called “Reforming America’s Housing Finance Market,” the real deal, or just another report to take up space in the National Archives?

“Our plan… dramatically transforms the role of government in the housing market,” the report asserts. “In the past, the government’s financial and tax policies encouraged housing purchases and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market.” (That means you, 2000s-era Fannie and Freddie.)

“The Administration will work with the Federal Housing Finance Agency to develop a plan to responsibly reduce the role of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the mortgage market and, ultimately, wind down both institutions,” the report continues. “Our plan presents several proposals for structuring the government’s long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit. We evaluate these proposals according to their effects on four key criteria: access to mortgage credit; incentives for investment in the housing sector; taxpayer protection; and financial and economic stability.”

The report has ambitions, certainly, but it didn’t recommend a particular course of action for the post-GSE world of residential finance. Instead, it made three broad suggestions, with details–and all the devils in those details–to be worked out later. Much later, possibly not until after the 2012 election, or even 2016.

One: Do not replace Fannie and Freddie with anything, and let the mortgage chips fall where they may in the private sector. It’s easy to imagine that such a scheme would last only until Americans (and more importantly, lobbyists for housing and many related industries) discover that would (possibly) mean that no one would could get a mortgage unless they had 40 percent down and were willing to accept a five-year balloon structure.

Two: Create a program that would insure mortgages only when a crisis hit. Besides having the same problem as number one, it might be tough to decide exactly what constitutes a crisis serious enough to pull the trigger on insuring mortgages.

Three: Discard the GSE pretense and have a new government agency insure mortgages all the time. Could be some moral hazard issues there, but at least it would have the advantage of being comfortably like the status quo, since the vast majority of mortgages are now insured, de facto, by the government anyway.

Consumers and economists feeling better

The Reuter’s/University of Michigan’s Consumer sentiment index for the end January, which was released on Friday, edged upward by 1.5 points to 74.2 from the mid-month reading of 72.7. That’s the best report since last June (though not quite as high as then), when the U.S. economy was enjoying what turned out to be a false dawn.

The positive components of the index turned out to be optimism about the job market recovery and, curiously, muted worries about inflation, despite the low rumblings of incipient energy- and food-price hikes so widely reported among various media outlets. One of the negative components of the index was the economy’s long-term outlook.

Separately, the Federal Reserve Bank of Philadelphia released the results Friday of a survey among economists about the direction of the economy. That too was more optimistic than before. The consensus among the 43 economic prognosticators was that the U.S. economy would grow at an annualized rate of 3.6 percent in 1Q11. Late last fall, a similar survey forecast a consensus of 2.4 percent for the first quarter of this year.

Wall Street was feeling peppy as well on Friday, with the Dow Jones Industrial Average gaining 43.97 points, or 0.36 percent. The S&P 500 advanced 0.55 percent and the Nasdaq did even better, with a 0.68 percent gain.

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