James Lockhart’s successor as director of the agency that regulates Fannie Mae and Freddie Mac will hold much of the US mortgage market in his hands when he takes the helm.
Government-backed mortgage financiers Fannie and Freddie own or guarantee 73 per cent of new mortgages in the country and 56 per cent of all existing single-family mortgages. The companies were taken into their regulator’s “conservatorship” last autumn, after mounting mortgage losses eroded their capital cushions and raised fears of collapse.
The government has pledged up to $400bn of taxpayer funds to keep the two companies afloat.
The replacement for Mr Lockhart, who on Wednesday announced his resignation, will thus have a central role in shaping the future of the giant mortgage financiers and of the US mortgage market writ large.
The White House has said it will unveil a plan for Fannie and Freddie when it releases its 2011 budget in February.
An administration official said it was still considering a long list of options for the so-called government-sponsored enterprises (GSEs) and that “no one option is under strong consideration at this time”.
Edward DeMarco, chief operating officer at the Federal Housing Finance Agency, will serve as acting director until President Barack Obama’s administration appoints a permanent successor. Fannie and Freddie have tapped $85bn of the Treasury’s lifeline so far, while the Federal Reserve has bought more than $1,000bn worth of their debt and mortgage-backed securities to try to push mortgage rates down.
The GSEs have also become the engine of government policies to modify or refinance mortgages for struggling borrowers, helping to fuel further losses at the companies.
Fannie on Thursday reported a $14.8bn loss for the second quarter and asked Treasury for a further $10.6bn of bail-out funds.
Many are asking how the government plans to extricate itself from such heavy involvement with the housing market when the crisis subsides.
One option could be a gradual wind-down of their operations and liquidation of their assets in a good bank-bad bank split. Other options include incorporating the GSEs’ functions into a federal agency, breaking them up into many smaller entities, returning them to their previous structure or conversion to a public utility model.
Fannie and Freddie were for decades shareholder-owned companies with a public mission to ensure the broad availability of mortgage financing.
The administration official said: “It should come as no surprise that the Administration is thinking through GSE reform, a commitment we made to Congress in the regulatory reform white paper, but we are in the preliminary stage of the process, the systematic development of options has not taken place and no decisions have been made.”
In an interview this week – just days before he announced his departure – Mr Lockhart said he was against nationalisation of the GSEs and that, while the old government-sponsored model could be made to work, “it would have to be structured a lot differently”.
Regulators would need power to restrict the size of their portfolios and make them conserve more capital, particularly “countercyclical capital” which would make them set aside more in the good years and less in the bad, said Mr Lockhart. This would also dampen housing bubbles.
“If you want to keep the 30-year mortgage…and you want to keep the money flowing in from the rest of the world to help fund our housing market, then you have to have a very robust secondary mortgage market,” said Mr Lockhart.
“You have to decide what you want that market to look like and how much government involvement you want in it. But you really have to draw the line very sharply, and it wasn’t in the past.”
Alternatively, he suggested they could be privatised and perhaps broken up into smaller chunks, but made to buy insurance from a government-run “catastrophe insurer” which would pay out if they incurred “giant” losses, but would leave them on the hook for smaller ones.
Mr Lockhart was wary of what legislators would ultimately come up with, however.
“It’s difficult to create those kinds of things up on Capitol Hill,” he said. “I don’t see a lot of appetite for nationalisation, but I think there’s going be a lot of tension between the ‘put it totally in the private sector’ [camp] versus the new GSE model.”