The Patsy Cline Model: Senators Said to Consider Breaking Fannie-Freddie Into Pieces

Senators Bob Corker (R-TN) and Mark Warner (D-VA) are proposing the Patsy Cline model for mortgage giants Fannie Mae and Freddie Mac.  That is, Corker and Warner are proposing that Fannie Mae and Freddie Mac fall to pieces.

(Bloomberg) -Joe Light– Two U.S. senators working on a bipartisan overhaul of Fannie Mae and Freddie Mac are seriously considering a plan that would break up the mortgage-finance giants, according to people with knowledge of the matter.

The proposal by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner would attempt to foster competition in the secondary mortgage market, where loans are packaged into bonds and sold off to investors, said the people.

Corker and Warner’s push to develop a plan marks Congress’ latest attempt to figure out what to do with Fannie and Freddie, an issue that has vexed lawmakers ever since the government took control of the companies in 2008 as the housing market cratered.

The lawmakers’ plan is still being developed, and a Senate aide who asked not to be named cautioned that no decisions had been made on any issues.

The stakes of changing the housing-finance system are enormous. Fannie and Freddie underpin much of the mortgage market by buying loans from lenders, wrapping them into securities and providing guarantees in case borrowers default.

Together, the companies back more than $4 trillion in securities.

Bear in mind, the motivating factor in any Fannie/Freddie construction is the preservation of the 30 year, fixed-rate mortgage that Fannie and Freddie purchase from lenders. But do we need the 30 year fixed-rate mortgage? 

Currently, the percentage of mortgages that are adjustable rate mortgages in terms of volume is only 8.5%.

The idea behind breaking up Fannie Mae and Freddie Mac into smaller pieces is to create more competition. But it also creates more infrastructure. And would it be regionally-based by the already existing Federal Home Loan Banking system? Now FHFA, the current GSE regulator, would have to regulate n+? additional GSEs (government sponsored enterprises). Just to keep the 30 year fixed-rate mortgage as the primary mortgage product (the US has a higher percentage of fixed-rate mortgages than any other country).

As of 2010, the US had 95% 30 year fixed-rate mortgages in their economy.

Perhaps another Patsy Cline tune sums up the Corker-Warner plan: Crazy.

Home Prices Continue To Rise (+5.67% YoY) As Borrower Demand Cools And Banks Ease Credit

The Case-Shiller 20 metro index of repeat-sales home prices is out for April (although it is almost July).  The index rose 0.28% in April MoM. And the composite index rose 5.67% YoY.

The biggest “winner” for home price growth? Seattle at 12.9% YoY. The slowest growing city? Cleveland at 3.4% (although Washington DC and New York are close at 3.6% and 3.8%, respectively).

This comes on Fannie Mae’s sobering report that purchase mortgage demand has dropped to the lowest reading in the past year.

And credit standards are expected to loosen, at least for GSE eligible loans.