The Obama administration rejected a corporate bid to buy insurance businesses from Fannie Mae and Freddie Mac, suggesting housing finance reform would be a better way to rebuild the housing loan market and prevent another potential economic collapse.
Bad loan investment pushed those companies close to bankruptcy in 2008, after which the government decided to seize control of Fannie Mae and Freddie Mac. The mortgage-finance companies took approximately $187 billion in government aid before returning to profit in 2013. Fairholme Capital Management on Nov. 13 proposed to lead a group in a $52 billion investment to begin the shift of Fannie Mae and Freddie Mac from government-sponsored entities to private businesses that could follow the best practices of the insurance industry.
Without mentioning that proposal by name, Gene Sperling, director of the White House's National Economic Council, said Wednesday during a conference in Washington, D.C., that taking parts of Freddie Mac and Fannie Mae private would not make the housing insurance market more secure.
"The risks are simply too great that this would recreate the problems of the past," Sperling said. "The only credible way to end the failed business model of Fannie Mae and Freddie Mac is through comprehensive housing finance reform."
Sperling spoke during a conference organized by the Urban Institute and CoreLogic, both of which are research groups.
Government proposals to revamp housing finance include a bipartisan bill introduced in June by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., which would replace Fannie Mae and Freddie Mac with a new government agency. Freddie Mac and Fannie Mae buy, sell and guarantee approximately two-thirds of America's housing loans. Those government-backed loans serve as a cornerstone of the economy, so any attempt to shift the entities to private sector would need to reassure the market's reliance on those guarantees.
Private capital has an important role to play in the future of housing finance reform, but taking Fannie and Freddie private would not create more balanced competition in the mortgage market, Sperling said.
"New entrants to the market would have a sensible reason to fear that they would find competing against this structural advantage to be prohibitively costly," he said. "All of us should fear that we could recreate a duopoly that the market would perceive as too-big-to-fail market entities."