How to Handle the Fannie Mae and Freddie Mac Wind-Down: Carefully, Slowly and Thoughtfully

24/7 Wall St.

The days of Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FMCC) could soon be history. President Obama is now on board with an orderly winding down of these institutions. What the public has to consider is that this will not be an easy task. In fact, winding down these organizations probably will take years.

How Congress and the president plan to handle a wind-down could have ripples in the mortgage market for years to come. President Obama being in favor of winding these entities down comes after things have of course stabilized after a financial crisis that could have taken down the entire system. Both Fannie Mae and Freddie Mac would have imploded as businesses on their own right had it not been for bailouts, and taxpayers have just started receiving debt repayments back from these two.

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The president said that winding these entities down and out of existence will help to make sure that the financial crisis never happens again. Many members of Congress on both sides of the political aisle are in favor of getting the government out of the housing market to the extent that it has been.

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The president said that Fannie Mae and Freddie Mac were allowed to make big profits buying mortgages for too long with the understanding that taxpayers and Uncle Sam would be a backstop. In short, this is the notion of private profits and public losses.

Our question is how the government will adequately treat and handle all of the debt instruments issued by Fannie Mae and Freddie Mac. They literally have billions upon billions of notes and other debt instruments, and that goes way beyond just the mortgage-backed securities pools that have been broken up into MBS pools, CMOs and other securitized cash flow instruments.

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It is possible that a wind-down will take place under one entity rather than the two entities. It is also possible that a modern day entity like the old Resolution Trust Corp. could be created. However the wind-down is conducted, it has to be done properly and with much thought and effort. Pulling the cornerstones out just because these entities are unpopular could bring much more damage than aid, particularly in the short term.

How ironic would it be if Franklin Raines helps in the wind-down?

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