Future of Fannie and Freddie could be wrapped up in amendment

The WSJ is reporting in this post that an amendment to the financial overhaul is bill is expected that would end the government’s subsidy of Fannie Mae & Freddie Mac in the future.  If you’ll recall the two quasi-governmental agencies that secure somewhere around 70% of all conventional mortgages in the US were taken into conservatorship by the Federal Government back in 2008.  The new bill would eliminate federal subsidies of the two agencies.  Given the financial conditions of each we can safely assume that should this bill pass they’d need to be dissolved or reorganized in order to survive.  From a free market perspective I don’t think this is such a bad plan.  However, Fannie & Freddie play a crucial role in keeping borrowing costs relatively low in the US.  The elimination of these two giants would certainly make borrowing more expensive on the part of consumers AND make mortgages harder to qualify for.  For a detailed explanation of the crucial role that Fannie & Freddie play in our mortgage market read THIS POST which I wrote back in July of 2008.

Here is a summary of the bullet points in the amendment:

1) The conservatorships for both companies would end two years after the bill becomes law, though the government would be able to extend it for another six months if necessary.

2) Three years after the conservatorship ends, their government charter would expire. Then the companies would have 10 years to operate under a special holding company so that they can dissolve remaining mortgages or debt obligations they held as government-sponsored enterprises.

3) After the companies leave conservatorship, their mortgage assets would have to steadily decline, capital standards would have to go up, and the size of loans they would be able to purchase would shrink.

4) The companies would have to pay state and local taxes.

5) Fannie Mae and Freddie Mac would have to pay a fee “to recoup full value” of the government guarantee they enjoy.

6) It would reestablish the $200 billion funding limit the government set up for both companies in 2008. On Christmas Eve 2009, the Obama administration lifted that cap to an unspecified level.