A former head of the Federal Housing Finance Agency wants to turn the government-backed mortgage giants Fannie Mae and Freddie Mac into lender-owned insurance companies.
Edward DeMarco, who ran the agency overseeing Fannie and Freddie for more than four years, and Michael Bright wrote a proposal for the think-tank Milken Institute that would turn the two firms into mutual insurance companies.
Although created by the federal government, Fannie and Freddie were technically private companies owned by shareholders until 2008. They buy residential and some commercial mortgages from lenders, stamp them with a repayment guarantee and securitize them in return for a fee – de-facto insuring them.
Under the Milken proposal, Fannie and Freddie would ditch this implicit insurance and become actual insurance companies that would let lenders buy insurance policies against their borrowers’ defaults.
The federal government has long implicitly guaranteed the firms’ mortgage bonds. In 2008, amid the U.S. housing crisis, it took control of the firms and bailed them out with a $187.5 billion cash infusion. Since then, Congress and the White House have hotly debated what to do with Fannie and Freddie. Although new legislation is unlikely to pass before the November elections, the Milken Institute’s proposal could give the debate new momentum. [Bloomberg] – Konrad Putzier