While most analysts are recommending minimizing Fannie Mae and Freddie Mac or even winding them down, the Federal Reserve says that the best way to rescue the United States housing market is to use the government-controlled GSEs in a larger capacity in the coming year to provide “cheaper mortgages to a broader pool of homeowners”[1]. The recommendation comes as a surprise to many, given that even the current administration’s official policy on the two debt-riddled agencies is that their role in housing finance should be reduced. However, in a paper sent to lawmakers yesterday, Fed analysts propose to expand GSE roles in government financing programs in order to bring down the inventory of unsold homes in the country and put more people back in a homeownership position. Part of this plan would include allowing Fannie and Freddie to refinance loans that they have not guaranteed.

The proposal for expansion comes fast on the heels of the paxroll tax cut extension, which was approved for two months right before Christmas and will be financed for decades using the fees from GSE-guaranteed loans. Some might argue that this proposal is nothing more than a grab for more loans on which to assess fees, but in the letter to lawmakers the analysts insist that the move would simply get more people back in vacant properties, thereby removing a stumbling block to the housing recovery and a greater economic recovery. The move would potentially allow as many as 2.5 million more existing homeowners to refinance their loans through the Home Affordable Refinance Program (HARP), but it would also create an even greater debt situation for the GSEs and, as a result, for the American taxpayers funding Fannie and Freddie.

On another note, the paper also addressed the possibility of renting out foreclosed properties directly rather than reselling them to investors and letting those individuals handle rentals. The Fed believes that if Fannie Mae would rent out just two-fifths of its present REO properties, GSE losses could be reduced substantially[2]. Critics of rental proposals argue that the government should not be involved in landlord positions and that attempting to rent out GSE REO properties directly would likely cost more in the long run in terms of new organizational costs than the GSEs would lose if they simply sold the properties in bundles to investors.

Do you think that Fannie and Freddie should have a larger role in the U.S. housing market? Is this a power grab on the part of the Fed or the GSEs?

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[1] http://www.reuters.com/article/2012/01/05/us-usa-fed-housing-idUSTRE8031SE20120105

[2] http://www.sltrib.com/sltrib/money/53229513-79/percent-fell-inc-rose.html.csp