BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Combine Fannie And Freddie, Says Former Ginnie Mae President

This article is more than 10 years old.

Treasury Secretary Tim Geithner and the Obama Administration issued a report on reforming American housing finance Friday morning, but all the plan did was punt the political football back to the now-Republican Congress.

That's the view from Joseph Murin, chairman of Washington-based Collingwood Group and the former president of Ginnie Mae, who says he was somewhat disappointed, but hardly surprised, by the administration's roadmap for Fannie Mae and Freddie Mac.

"Political posturing," he says, "it's a meaningless document from our perspective." Like punting a political football to Congress, Geithner and Co. have essentially set the stage for grandstanding all the way through the 2012 presidential campaign, Murin believes.

Rather than the Obama Administration's plan – which calls for winding down Fannie and Freddie's portfolios and ending pricing advantages to get the private sector back in the mortgage game – Murin says the GSEs should be merged into a single entity that is 100% responsible for its credit losses "with no guarantee, either implicit or explicit." (See "Geithner: End Fannie And Freddie's Pricing Advantage.")

Westwood Capital's Dan Alpert concurs in comments via e-mail this morning:

The report is best characterized as ham and cheese on white bread with mayo….nourishing insofar as it feeds us a reasonably accurate historical summary of the absence of sanity that took hold of the mortgage finance system over the past 15 year; but uninspiring and timid in its lack of firm support for a set of absolute goals and timelines that will bring the erstwhile practice of business-as-usual to an end.  We can only hope that the administration and the independent regulators move swiftly to obtain market and analytical comment and get on with the task at hand.

The GSE’s should consist of a merged and non-private Freddie/Fannie agency to be restricted to the insurance of mortgages or RMBS that conform to very tight limits. We do not believe that private markets are large enough to absorb risk on the nearly $7 trillion of mortgages that currently enjoy one form of government guarantee or another.

The real problem with Fannie and Freddie is not their infrastructure and framework, but the bad business model of meeting requirements set forth by the government while trying to do what's best for shareholders. Just this week, as Forbes contributor Francine McKenna points out in a post this morning, a director of Freddie Mac (still publicly-traded albeit not on the NYSE) told CNBC the board answers only to the conservator and not to shareholders.

The difference between the bailout of Fannie and Freddie -- $150 billion plus and no signs of stopping – and the TARP program, Murin says, is that TARP injected capital into viable business entities that made money and paid back the government, including firms like AIG, Citigroup and Bank of America that seemed beyond saving at some points. "[Fannie and Freddie] are crippled, not viable business entities. And the people qualified to run them all have their resumes out on the Street to get out." He cites this week's resignation of Freddie COO Bruce Witherell as an example. (See "Fannie, Freddie Black Hole Overshadows Bailout Successes.")

"I'm not that smart, I'm realistic," Murin says, acknowledging that the government will need to stand behind principal & interest for another five or 10 years in an FDIC-style role to get investors back in the game. Ultimately he thinks Fannie and Freddie can return to profitability, like his former employer Ginnie Mae, but it certainly won't be anytime soon.

Shares of Fannie were up 7 cents, or 11.3%, to 67 cents each Over-The-Counter Bulletin Board, while Freddie Mac gained 8 cents, or 13.3%, to 72 cents Friday morning.

James Lockhart of W.L. Ross, the former overseer of the GSEs, told Bloomberg TV he hopes the five to seven year timetable set out by Geithner will prove realistic and expects the worst is over when it comes to the price tag for taxpayers, though there is still some pain ahead.

Follow my blog Exile On Wall Street, or Twitter @SchaeferStreet.