If the debate over what to do about Fannie Mae and Freddie Mac were a boxing match, last week's hearing before the House Financial Services Committee would have been the first round, where the fighters circle each other and probe for weaknesses in their opponents.
The ongoing crisis in the housing and mortgage finance markets formed the ring for the battle. Known as government sponsored entities, Fannie Mae and Freddie Mac together formed a large part of the secondary mortgage market for the U.S. before the financial crisis and became dominant afterwards.
After the crisis in mortgage-backed securities came to full flower, the government stepped in and conserved the two mortgage giants as most of the private firms, hedge funds and other entities either folded, merged or got out of the market, leaving the GSEs the last standing.
The first jabs of the hearings came from some Republican legislators. They suggested the Democratic majority had delayed starting the process to reform the GSEs and the secondary mortgage market because they had helped cause the housing crisis by pushing Fannie and Freddie to lower their mortgage underwriting standards.
"It's unacceptable that, more than 18 months after the GSEs were placed in conservatorship, the Treasury Department still does not have a plan for Fannie and Freddie," said Alabama Rep. Spencer Bachus, the ranking Republican on the committee. "While the administration and congressional Democrats have remained silent, Republicans have introduced legislative measures to immediately address the failures and put forth real solutions."
But Barney Frank (D-Mass), chairman of the committee, would hear none of it. He countered the Republican charges with the observation that the housing and mortgage crisis had their roots during times when the Republicans had been in charge and that they had not done anything to reform or change the system through which Fannie Mae and Freddie Mac worked.
"The history gets forgotten here," Frank said. "The Republican party controlled the House from 1995 through 2006. No legislation [to reform the GSEs] became law at that point. The House did pass a bill in 2005, when this committee was under Mr. Oxley [R-Ohio], to reform Fannie and Freddie that most Republicans supported while others opposed it as too weak.... But it was a Republican bill under a Republican House...so I don't know what the presumption is that we somehow took over Mr. Oxley's or that we captured his mind," Frank added. He then pointed out that amendments that some of the Republicans had offered to give the 2005 measure stronger teeth only attracted a minority of support from their fellow Republicans. "So the notion that the lack of a reform effort was a Democratic problem will just not fly."
Once the two sides paused from blaming each other for what happened, they turned to U.S. Treasury Secretary Timothy Geithner, who kept much of the Obama administration's position on what to do about reforming the secondary mortgage market vague, laying down only two firm principles. First, Fannie Mae and Freddie Mac should be reformed and not eliminated and, second, there should remain some role for the federal government in the secondary mortgage market.
"I don't think there is a credible argument that we can abolish, or put out of business, these institutions today," Geithner told the committee, while in his prepared statement he defended a federal role. "The administration intends to develop a comprehensive reform proposal for the GSEs role in the broader housing finance system."