The government is ordering Fannie Mae and Freddie Mac to delist their stock from the New York Stock Exchange, but the move is motivated by the fact that both companies’ share prices often trade below the minimum $1 average closing price — not because any decision has been made about their future.
Although many analysts believe shares in Fannie and Freddie are worthless, they will continue to trade in the over-the-counter market, and both companies will continue to file reports on their financial results to the Securities and Exchange Commission.
The Federal Housing Finance Agency’s order to delist their shares "does not constitute any reflection on either Enterprise’s current performance or future direction, nor does delisting imply any other findings or determination on the part of FHFA as regulator or conservator," regulators said in announcing the move.
Fannie and Freddie were placed in government conservatorship in September 2008. The Obama administration has said the government is prepared to stand behind the companies for at least three more years, and has pushed back an overhaul of the housing finance system until Congress passes legislation overhauling regulation of the financial system.
Once that happens, the administration wants the debate over Fannie and Freddie’s future to be part of a broader discussion of housing finance.
Testifying before the House Committee on Financial Services in March, Treasury Secretary Timothy Geithner noted that Fannie Mae and Freddie Mac "are only one part of a whole set of institutions that support housing finance," which also includes FHA, VA, USDA and Ginnie Mae, the Federal Home Loan Banks, commercial banks, thrifts, community banks, community development financial institutions, credit unions, private issuers of mortgage-backed securities, and mortgage brokers.
"Any restructuring of Fannie Mae and Freddie Mac must be done as part of a reform of the wider housing finance system and placed within the context of broader housing policy objectives to ensure that the functioning of the whole system is advanced," Geithner said.
On April 14, the Obama administration announced it was seeking public input on reforming the housing finance system.
The public can submit written responses at www.regulations.gov until July 21, and the administration intends to hold a series of public forums across the country on housing finance reform this summer and fall.
The government’s level of direct involvement in the housing finance system "must change, and the administration is committed to encouraging private capital to return to the housing finance market," Housing Secretary Shaun Donovan said at an April 14 hearing.
"The substantial direct support for the housing markets that has been put in place will be allowed to fade as the market recovers and fully stabilizes, and we have taken initial steps to prepare for this."
In prepared testimony before lawmakers in March, the National Association of Realtors recommended a middle road between privatization and nationalization.
Fannie Mae and Freddie Mac, the group said, should be converted into government-chartered, non-shareholder-owned authorities subject to tighter regulations on product, profitability and retained portfolio practices "in a way that ensures the protection of taxpayer monies."
NAR argued that privatization is not a realistic option, because it’s "extremely unlikely" that enough private capital could be attracted to assume Fannie and Freddie’s market share.
The mortgage giants financed or guaranteed more than 70 percent of single-family home purchases in 2009, up from 40 percent in 2006 (Loans guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Department of Agriculture (USDA) accounted for another 25 percent of originations in 2009.
The U.S. residential mortgage market stands at $12 trillion, with the GSEs owning or guaranteeing $5 trillion of mortgage debt outstanding, NAR noted.
NAR said converting Fannie and Freddie to federal agencies, or merging them with the FHA and Ginnie Mae, would conflict with NAR’s desire to "remove, as much as possible, any ability to have the taxpayer fully on the hook to protect these entities."
Nationalization would also remove competition in the mortgage market and any incentive for innovation, NAR said.
As envisioned by NAR, if Fannie and Freddie were chartered by the government but not owned by shareholders, they could be self-sufficient and price risk effectively to cover potential losses, utilizing any profits to establish capital reserves to alleviate losses that occur in economic downturns.
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