The Third Rail, Talking about Fannie Mae and Freddie Mac – a subject too hot to handle

Those of us who grew up near subway lines remember their parents' warning-- stay away from the third rail, the super-electrified source of energy for the subway cars.  The third rail is an appropriate metaphor for all dangerous subjects.  In her column in Sunday’s New York Time, Housing Policy’s Third Rail, Gretchen Morgenson discusses a taboo, Fannie Mae and Freddie Mac.

WHILE Congress toiled on the financial overhaul last spring, precious little was said about Fannie Mae and Freddie Mac, the mortgage finance companies that collapsed spectacularly two years ago.

Indeed, these wards of the state got just two mentions in the 1,500-page law known as Dodd-Frank: first, when it ordered the Treasury to produce a study on ending the taxpayer-owned status of the companies and, second, in a “sense of the Congress” passage stating that efforts to improve the nation’s mortgage credit system “would be incomplete without enactment of meaningful structural reforms” of Fannie and Freddie.

No kidding.

With midterm elections near, though, there will be talk aplenty about dealing with the companies precisely because Dodd-Frank didn’t address them. Unfortunately, if past is prologue, this talk is likely to be more political than practical.

Those in the residential real estate industry know that Fannie and Freddie provided the fuel to the housing boom.  Talk about an upset stomach when the bust arrived.  The only medicine for these behemoths was a federal rescue.

The Treasury’s study on Fannie, Freddie and housing finance must be delivered to Congress by the end of January 2011. In a speech last week, Timothy F. Geithner, the Treasury secretary, told a New York audience that resolving the companies isn’t “rocket science.”

According to Morgenson,

“attaining genuine remedies for our housing finance system could actually be harder than rocket science. That’s because it would require an honest dialogue about the role the federal government should play in housing. It also requires a candid conversation about whether promoting homeownership through tax policy and other federal efforts remains a good idea, given the economic disaster we’ve just lived through.”

Understanding how Fannie and Freddie did business requires a dialogue.  “Alas, honest dialogues on third-rail topics like housing have proved to be a bridge too far for many in Washington.”

Morgenson outlines how the nation’s largest buyers of mortgages did business.  Understanding that process, and not repeating it is the key to overcoming the problems the housing market faces.

“Understanding how these companies operated is crucial if we want to avoid repeating the mistakes of our recent past. So, when you hear about Fannie and Freddie reform this fall, remember that we still don’t know the half of it.”

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Stephen M. Flatow 

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