Fannie Mae-No Politics (FNMA)

[DickCheney]

Direct quotes from Paulson article:

[He does not recommend eliminating F&F, just reforming them and instilling "the discipline of a private market" -- fearmongers on this board might try to make you believe that this spells doom for the GSE's -- cheerleaders here might construe this as getting the government out of the GSE's and back into private hands ]

Why has it been so hard to reform the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac?

Fannie and Freddie are a big part of the incentive structure that vested interests want to protect, along with the mortgage interest tax deduction and state housing programs. Those strong vested interests include homeowners, real estate brokers, homebuilders, and investors.

Bond investors also have a strong vested interest in the status quo. When we stepped in to put the GSEs into conservatorship, there was $5.4 trillion in Fannie and Freddie securities held globally—$1.7 trillion were held by central banks around the world; $3.4 trillion held in the US, where they flowed like water through our financial system. Community banks, pension funds, and money market funds all held GSE securities. Even though there was no explicit government guarantee, they were treated almost like the equivalent of Treasury bonds.

Imagine if [a GSE] auction had failed and how a price drop would have impacted confidence in their securities. It was unthinkable. Fortunately, we were able to stabilize Fannie and Freddie before Lehman came unglued—that was essential. The GSEs were nine times bigger than Lehman.

How would you reform the GSEs?

We need to work toward a system where government subsidies don't set the terms for the market. We have to dramatically rein in the missions of the GSEs by not only eliminating their ability to hold mortgages, but limiting the mortgages they can ensure. You can do that by limiting the mission to first time homebuyers, by the size of the mortgage Fannie and Freddie can back, borrower income, or all of the above.

Importantly, we need to make sure there is no implied government backed guarantee on Fannie and Freddie corporate debt.

What happens if nothing changes at Fannie and Freddie?

Without the discipline of a private market, we are in danger of creating another speculative housing bubble, which would again result in massive losses and economic hardship when it bursts.

http://finance.fortune.cnn.com/2013/08/28/hank-paulson-fannie-freddie/?source=cnn_bin