April, 2012

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FEATURE SECONDARY MARKET The Last Word on Fannie and Freddie The federal regulator responsible for Fannie Mae and Freddie Mac surprised the mortgage industry in March with blueprints for a new, GSE-free secondary market. We examine six proposals currently in the pipeline and why conservatorship just may survive for at least a few more years despite them all. By Ryan Schuette N early four years after the word subprime went viral, taking on airs usually reserved for weapons of mass destruction, analysts still disagree over the story of how Joe and Jane Taxpayer met Fannie Mae and Freddie Mac. Some point fingers at "home affordability," a tarnished phrase once billed by compassionate conservatives and Third Way lib- erals alike as a tenet as American as the ballot box; others chalk up the Great Recession to junk loans overlooked and oversold by Wall Street's Gordon Gekkos. For his part, then-President George W. Bush helped pen the Freddie- and-Fannie chapter by signing off on the bipartisan bill in 2008 that created the GSEs; their regula- tor, the Federal Housing Finance Agency (FHFA); and infused the mortgage giants with federal lifeline that now roughly totals $180 billion. Writing to lawmakers in February, FHFA Acting Director Edward DeMarco took a stab at the finale by releasing a 21- page strategic plan pointedly titled "The Next Chapter in a Story that Needs an Ending." The framework—a white paper that he made clear lawmak- ers themselves would need to consider and undertake—skirted any specific recommendations in favor of a broad look at reform and possible measures that nearly rival the Marshall Plan in scope. The plan to take Fannie and Freddie off the taxpayer dime arrives at a time ripe for change. The mortgage giants continue to hemorrhage money despite repeat- ed Treasury draws and multimil- lion-dollar bonuses for seasoned executives. Just this last quarter, Fannie Mae posted $2.4 billion in net losses, less than $5.1 billion from the past period. Freddie Mac brought in $619 million for the fourth quarter, an upbeat note from $4.4 billion from the third quarter overshadowed by plans at the FHFA to request another $146 million from Treasury. Some may take silver linings for sunlight, but a cloud hangs over the average taxpayer, who ultimately still bears the risk for the nation's mortgages—and will likely never see reimbursement. Amid many suggestions for reform in the proposal, the FHFA said in no uncertain terms that the GSEs' "losses are of such magni- tude that the companies cannot repay taxpayers in any foreseeable scenario." No wonder the acting director insisted on "working with Congress and the administration" in an introduction to the proposal. In an exclusive interview with DS News, our sister publication, in March, DeMarco called the path forward in his strategic plan "a way in which the infra- structure we're building is flex- ible to whatever policy outcome lawmakers decide on . . . to show forward momentum [and] gradually [recede] the enterprises' footprint in the marketplace." Flexible indeed. DeMarco's plan preferred broad sketches THE M REPORT | 75 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET

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