FannieMae

Homeowners looking for a hand with energy efficiency just got dealt a big blow – and the fallout could affect everyone looking to take out a mortgage.

As the Wall Street Journal reports, the federal regulator that oversees Fannie Mae and Freddie Mac announced this week that it will not permit homeowners with mortgages owned by those agencies to participate in property-assessed clean energy (PACE) programs.

PACE, which has been approved by legislatures in 23 states, lets homeowners finance weatherization projects by getting loans from their local government. Those loans then get paid back over time via property tax bills, much like a sewer assessment. In order to raise money for the loans, local governments sell bonds to investors.

That's not acceptable to the feds, who object to having other creditors in front of Fannie Mae and Freddie Mac's investors, when it's time to get paid back.

Two gigantic companies, Fannie Mae and Freddie Mac, contributed to the housing crash and the near collapse of the banking system. So, now that we are reforming the financial system, what should we do to punish or reform these two mortgage giants?

Nothing, for the most part. Fannie Mae and Freddie Mac should continue to operate the way they do today.

Now, before you rush to leave an angry comment, consider this: The most important reform that we could possibly make to Fannie Mae and Freddie Mac has already happened, and there's a serious risk that Congressional "reform" will undo that change.

So why did the Obama Administration last week increase the amount of Fannie Mae and Freddie Mac losses it would cover from the previous limit of $400 billion to the new limit of infinity? In the simplest terms, it was to reassure investors like China or Saudi Arabia who have bought or might buy in the future the securities of Fannie or Freddie. But among mortgage professionals I have spoken with, there is a general feeling, too, that the extra funds will be needed.

"They've been hiding losses as long as they can and will soon have to start taking them, " said one friend who has been in the mortgage business much of his life.

Remember that the amount of room left under the previous cap for guaranteed losses at Fannie and Freddie was $289 billion ($400 billion minus $111 billion already spent). The amount of Fannie and Freddie securities in the market totals about $5.5 trillion. So, for another $289 billion in loans to go sour, you'd need only 5.2 per cent of existing mortgages to fail. Right now, 4.7 percent of U.S. mortgages are in default, under foreclosure, or bank-owned. Most of those homes will be lost in the next 12 months.

Last week, just before Christmas, the Obama Administration quietly increased the amount of losses it would cover at Fannie Mae and Freddie Mac -- the two Federally-chartered (and now controlled) securitizers of home mortgages -- from a combined $400 billion to infinity. I'm going to look at this move in two parts, first considering the political considerations then the economic ones.

"All politics is local, " said the late Tip O'Neill when he was Speaker of the House. If Tip was right, and it is easy to argue that he was, then there is a local political basis for this action by the Obama Administration. Political pundits (the worst kind) are tending to see it as a shifty move by the President against Congress, but I tend to see it as a shifty move by the President for Congress -- at least for Democrats in the House and Senate.

The original Bush-era deal to take Fannie and Freddie under conservatorship allowed the White House to modify the deal without further Congressional approval until the end of 2009. So this week, expanding the amount of losses covered by the Feds requires nothing but a signature. Next week, it would require literally an Act of Congress.

The epic drama of Wall Street bailouts and Main Street foreclosures riveted the nation in 2009. Meanwhile, financial industry groups and Washington policy advocates have been prepping for the big story of 2010: The fight over the future of Fannie Mae and Freddie Mac -- and with them, the fate of the 30-year, fixed rate mortgage that built the American dream.

The Obama administration has said that by February, it will lay out its vision for Fannie and Freddie, which in some form have been the bedrock of home mortgage financing since 1938. For months now, industry and consumer groups have huddled over bullet points, figuring out their official positions.

On the basics, they come surprisingly close to a consensus. Bankers and consumer groups alike want to essentially sign Fannie and Freddie up as contestants on The Biggest Loser. In place of gi-normous shareholder-owned, government regulated companies on a quest for stratospheric stock prices, the feds would back mini-Fannies that would sell and guarantee mortgage-backed securities under federal regulation. That would ensure that most Americans would continue to have access to long-term mortgages at fixed interest rates, something that wouldn't likely happen if left to the private market.