I've blogged several times about the currently unclear and undecided plans of the Obama administration and Congress for Fannie Mae and Freddie Mac. So I was interested to see this new report by the GAO outlining the issues and laying out what it sees as the general options. The report runs some 60 pages, and I've only had a chance to read it rapidly. It does not seek to do more than provide background and options, rather than arguing for a particular recommendation for how to resolve their GSE status. However, on my quick read, it is pretty well done, cogent and written in plain language. For that matter, the news summary of the report that first drew me to it, by Jody Shenn in today's Washington Post (September 11, 2009, "GAO Analysis Skeptical About Privatizing Fannie, Freddie") is a pretty good, clear summary.
At analytical bottom, however, and as I said here before, the choices come down to some version of fully privatize, fully government agentize, or continue as some form of mixed GSE. As the GAO notes, each of them has problems. The worst option is to return them to active GSE status as profit-seeking, shareholder-owned entities but with a government guarantee (both for the debt they issue via securitization as well as for the portfolios they invest in) and hence a subsidized and distorted capital cost, and great susceptibility to politicization (both to be corrupted by Congress and to corrupt it). The second worst option is to do nothing and continue to watch the portfolios slide in government hands while contributing little to getting the securitization markets up to speed with better risk and capital management.
(The Treasury White Paper on financial reform, out a few months ago, does not offer a prescription for what to do with Fannie and Freddie. The administration has said it will have a plan to offer by early next year. If you follow the articles in the WSJ and Washington Post, there is not much clarity, to the public anyway, of where the administration might decide to go.)
(As I've also noted before, but as this recent Wall Street Journal news article by Nick Timiraos lays out in what might turn out to be chillingly prescient detail, there is another mortgage finance situation rapidly evolving - the FHA - and its adventures into subprime, little money down, etc., etc., home mortgages.)