The Fannie and Freddie show continues… and continues

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Bloomberg is reporting that Fannie Mae and Freddie Mac’s regulator is renegotiating the terms of the housing agencies’ financial rescue with the Treasury Department. According to unnamed people “familiar with the talks,” this renegotiation could include increasing the size of the agencies’ $400 billion lifeline—so far, Fannie Mae has tapped $60.9 billion and Freddie Mac $50.7 billion—and possibly cutting the dividends the agencies pay to Treasury on the borrowed money.

Things at Fannie and Freddie are still a mess, it seems. That makes me wonder why in some 1,300 pages of thoughts on how to reform the financial sector last week, the U.S. House of Representatives didn’t mention Fannie or Freddie once.

The lynchpin part of the nation’s financial system that is effectively owned by the government, the government has yet to ring in on. We’ve got proposed changes for credit rating agencies, over-the-counter derivatives, hedge funds, the insurance industry, executive compensation, institutions that are “too big to fail,” even individual home loans—but not for the two government-sponsored entities that own or guarantee half of the nation’s $11 trillion mortgage market.

To be fair, the Feds are working on it. And it’s probably better to take more time and get this right—or as close to right as is possible—than to rush ahead willy-nilly. Still, it’s a little annoying that there seems to be plenty of time for topics like creating jobs, which the federal government can’t really do much about anyway, and yet not for figuring out how to deal with the $111 billion albatross hanging around taxpayers’ necks.

A lot of people outside of government have been coming up with ideas. A group of professors at New York University’s Stern School have written this proposal (PDF), which includes Fannie and Freddie dropping their mandate of promoting home ownership among low-income households (that’s better left to other agencies, the profs write). The Center for American Progress, a think tank the Obama Administration has been known to listen to, is circulating a plan, which includes explicit federal guarantees on certain mortgage-backed securities (no more of this implicit nonsense). A third set of ideas can be found here (PDF), in a paper by a former Freddie Mac executive and the director of University of Southern California’s Lusk Center for Real Estate. One thought: covered bonds, which is how mortgage finance works in a lot of European countries.

We’ll have to wait to see what combination of ideas the Obama Administration produces. I’d think they’d want to hop to it, considering how key the two housing agencies are to efforts to boost mortgage refinancing and loan modifications. Or maybe that’s why we don’t have a vision for the new Fannie and Freddie yet: we’re still not done using them in their current form.