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Next on the Administration’s Agenda: the GSEs

Now that the Obama administration can claim victory in passing financial regulatory reform, it's setting its sights on restructuring the housing finance system, namely the GSEs.

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The White House says it will put forth a formal proposal by early next year, and some say its focus will be a departure from the age-old adage of homeownership as everyone's ""American Dream,"" and shift support for the housing market from ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com to the private sector.

Between the GSEs, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA), the government is currently financing 96 percent of the nation's new mortgages, according to recent industry estimates.

The secondary market lobbying group, the ""Securities Industry and Financial Markets Association"":http://www.sifma.org/news/news.aspx?id=17728 (SIFMA), warns that the government can't completely pull out of the mortgage market without sending costs skyrocketing for consumers.

Tim Ryan, SIFMA's president and CEO, said ""While recognizing that there is no single right answer to GSE reform, it is critical that, in addressing this complex task, the benefits to consumers and the economy which are created under the current system be preserved. We encourage policymakers to fix what's broken without dismantling the aspects that have provided efficient, cost effective lending and benefits to our economy for the last 30 years.""

There's no doubt change is coming for the nation's two largest mortgage companies. Many were disconcerted that the Dodd-Frank Wall Street Reform and Consumer Protections Act didn't include a new blueprint, or at least new rules, for Fannie and Freddie.

Rep. Darrell Issa (R-California), ranking member of the House Oversight and Government Reform Committee,

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called the president's signing of the Dodd-Frank bill a ""charade"" on true reform, particularly in light of ""Issa's recent investigation"":http://dsnews.comarticles/house-investigation-uncovers-153-vip-countrywide-loans-to-fannie-execs-2010-07-22 that revealed former executives at both Fannie Mae and Freddie Mac accepted so-called sweetheart loans from subprime mortgage lender Countrywide before it imploded.

""Despite the fact that the federal government was a willing accomplice in this nexus of special interest influence's effort to shape the mortgage market jeopardizing our fiscal solvency, the President and Democratic Congress have responded to repeated calls to reform Fannie and Freddie with a deafening silence,"" Rep. Issa said.

Since the federal government took control of the GSEs in September 2008, the two companies have had to draw $146 billion in federal funding to stay afloat, giving taxpayers an 80 percent ownership stake in the mortgage financiers. Fannie and Freddie's rescue has become the costliest of all the government bailouts, making the fact that the two companies were never mentioned in a bill that promises to end ""too-big-to-fail"" even that much more ironic.

Recent estimates from the Congressional Budget Office (CBO) put the tab for subsidizing Fannie and Freddie at $389 billion, when all is said and done.

Even Edward J. DeMarco, acting director of the GSEs' regulator, the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA), says it's time to ""reexamine the hybrid structure of Fannie Mae and Freddie Mac.""

In a speech at an industry conference earlier this week, DeMarco said, ""One clear message that emerges from the housing boom and bust is that, irrespective of what roles we ask the government to play in housing finance, we should not repeat a structure where public mission and private motive are commingled, as was the case at Fannie Mae and Freddie Mac. The misaligned incentives created by such a structure undoubtedly contributed to excessive risk taking and a lack of market discipline, both of which directly contributed to the substantial losses for Fannie Mae and Freddie Mac-and by extension, taxpayers.""

""Moody's Investors Service"":http://www.moodys.com says the most likely scenario for GSE reform is a ""lack of consensus and a drawn out process.""

The ratings agency's analysts argue that the timing and extent of GSE reform elicit strong emotions across the political spectrum, with Congress weighing the frustrations regarding the cost of the GSE bailout to taxpayers against the risk of harming the housing market.