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  • How Oba-Mae Will End Fannie Mae's Conservatorship 0 comments
    Jun 14, 2013 1:09 AM | about stocks: FNMA

    President Obama succeeded in ending the Iraqi and Afghanistan wars ordered by former President George W. Bush. Will President Obama be successful in ending the conservatorship for Fannie Mae enacted by former President George W. Bush? The recent swings in Fannie Mae certainly call for ending the conservatorship with an Oba-Mae.

    What will an Oba-Mae look like? The debate on the Corker-Warner draft bill has certainly triggered serious thoughts on what reforms should be introduced into Fannie Mae in order to make an Oba-Mae. The Corker-Warner draft bill appears to have the potential of exaggerating political and financial problems in the housing system on several fronts:

    (i) Higher mortgage cost for all homeowners. Fannie Mae benefits from cheaper foreign savings and by bringing private sector efficiency and closer government oversight, and thus has been able to help lower the mortgage costs. When Fannie Mae is completely privatized as proposed in the Corker-Warner draft bill, mortgage costs will jump immediately, if not even earlier.

    (ii) Even higher mortgage cost for middle income families. As designed in the Corker-Warner draft bill, lower income families will be supported by FHA - a public interest agency. Middle income families will be left to the mortgage market.

    (iii) Lower assistance to lower income family homeowners. Since the Federal budget for the new subsidy program under FHA will be debated by Democratic and Republic Parties every year, there will be less and less chance for getting more assistance to lower income families due to the persistent budgetary deficits. Under Fannie Mae, Democratic members can always find ways to secure more favorable programmes for lower income family homeowners.

    (iv) Higher costs to taxpayers in case of crisis. A rough calculation has shown that Fannie Mae was one third cheaper than a private alternative for the rescue in the recent Great Recession.

    (v) Slower house recovery after crisis. In the absence of private sector interests, Fannie Mae has been able to take up 90% of new loans in the past few years, contributing to the quicker overall recovery from the Great Recession.

    But Fannie Mae must be reformed. The to-do-list for President Obama needs to include at least the following:

    (1) Private sector must take the loss first - an idea advocated in the Corker-Warner draft bill. The recent US lawsuits against big banks indicated that big banks simply passed their wrongdoings to Fannie Mae. If all can be recovered from big banks, Fannie Mae does not need any financial assistance from taxpayers. But during the crisis like the recent one, taxpayers have to rescue big banks directly or through an institution like Fannie Mae. Oba-Mae needs to weigh which way is less costly for taxpayers, and establishes rule-books so that future rescues can lay more fair blames on Fannie Mae, or Fannie Mae is enacted to resist being a scapegoat.

    (2) Management reform at Fannie Mae. Oba-Mae needs to re-introduce incentive measures such as bonus to encourage better management performance at Fannie Mae. It is unfair for current management at Fannie Mae who are doing a remarkable job.

    (3) Re-affirmation of honoring foreign debts and private property. By keeping the essential characters of Fannie Mae intact, Oba-Mae will send a strong signal to foreign and domestic investors that: Fannie Mae is back, and they should feel safe with their investments.

    By doing these without causing any hassle to the mortgage market, President Obama is building another legacy in history.

    Themes: mortage market Stocks: FNMA
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