Fannie and Freddie tumble on "idiotic proposal" to wind down GSEs

Aaron Task
·Editor in Chief

Shares of Fannie Mae and Freddie Mac were down sharply for a second straight day after Senate Banking Committee members Tim Johnson (D-SD) and Mike Crapo (R-Idaho) outlined plans to wind down the mortgage giants.

In a nutshell, the plan would replace Fannie and Freddie with an FDIC-like regulator to oversee the mortgage-backed securities market while requiring private investors (vs. taxpayers) to take the first 10% of any loss before any government backstop kicks in.

Of course, this is just the outline of the plan and there are major political obstacles to getting anything done in Congress, much less on such a contentious issue as the government's role in the housing market. Most political observers do not believe the proposal will make it through Congress -- or avoid President Obama's veto pen if it did survive the legislative gauntlet.

"We think there are several obstacles blocking the Johnson-Crapo bill in the Senate," writes Brian Gardner, SVP of Washington Research at Keefe, Bruyette & Woods:

  • Time: "In a shortened election year, the Senate calendar is already crowded with other legislation and pending nominations. It will be difficult for the Senate leadership to find time to schedule for a bill as complex and politically sensitive as a GSE reform bill."

  • Politics: "We think the Senate Democratic leadership will be reluctant to force their vulnerable members to take difficult votes on a politically sensitive issue like mortgage finance."


And then there's the House where "there is deep unease among House Republicans to maintaining a significant federal backstop for the U.S. mortgage market," according to The WSJ.

In the accompanying video, I discuss the proposal with Barry Ritholtz, chairman and CIO of Ritholtz Wealth.

Rarely shy about expressing his opinion, Ritholtz decries the Johnson-Crapo bill as another "idiotic proposal" from Congress. "Why do we want the federal government backstopping securitized loans?" Why is it necessary for them to do it?" he asks. "Either let the free market do what it's going to do...or you let the government do it, which worked fine from post-Depression to 1967 when we spun out Fannie Mae to get mortgages off the balances sheet of the government because JBJ was spending so much money on Vietnam."

So if this Senate proposal is "idiotic" and doomed to fail politically -- what's a better way to unwind the government's oversized role in the mortgage market? And how can it be done without sabotaging the housing market, which is hugely reliant on the government backstop?

Watch the accompanying video to see Ritholtz's (ahem) modest proposal.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.