WASHINGTON — From the mortgage market to the campaign coffers of lawmakers, the government's decision to place Fannie Mae and Freddie Mac in conservatorship will change what constitutes business as usual.
What the new business as usual will look like won't be sorted out for a long time.
Industry experts say credit unions–which have done more loan business in the last six months than the same period last year–will have more competition. The additional capital being pumped into Fannie and Freddie will enable them to buy more mortgages, which will in turn provide more capital for financial institutions.
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"It doesn't solve the problems in the housing market. What it does is take way some of the negatives," said Bill Hampel, CUNA's senior vice president of research and policy analysis and chief economist. "It will also become more attractive for credit unions to sell fixed-rate mortgages on the secondary market."
During the first half of 2007, credit unions sold 25% of their mortgages on the secondary market, compared with 27% in 2007 and 30% in 2006, according to the NCUA.
In its Sept. 7 action, the Treasury Department seized control of the mortgage giants–which together control about $500 trillion worth of mortgages–and sought to stop the bleeding in an already battered housing market. Fannie and Freddie had combined losses of $14.9 billion during the past year. The department used powers it requested and received when Congress passed a massive housing relief measure this summer.
The actions included both a promise of capital to avoid Fannie and Freddie going broke and replacement of the top executives at the two government- sponsored enterprises. The Treasury Department will receive $80 billion of preferred stock in the companies and agreed to infuse up to $100 billion in capital in each company.
"Nobody likes what the Treasury Department did but the alternatives were worse," said W. Michael House, a Washington lawyer who has been a long-time advocate of reforming the two mortgage buyers. "It's about how to make markets function effectively. But remember, even though mortgages will become more available, given the economic situation there is a question whether people can afford mortgages."
Congress and this and the next administrations will be tasked with figuring out what form Fannie and Freddie will take.
Two of the mortgage buyers' biggest supporters on Capitol Hill are Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D-Mass.). They have both spoken of the important role of Fannie and Freddie in stabilizing the housing market and making homeownership available to a wide range of citizens.
Some Bush administration officials and congressional Republicans want to shrink Fannie and Freddie, and Sen. Jim DeMint (R-S.C.) has called for them to be broken up and forced to survive in the marketplace.
As GSEs, Fannie and Freddie are hybrids, for-profit companies that issue stock but are backed by the federal government.
The fallout from the woes of Fannie and Freddie could impact the fate of one of the top priorities of credit unions: regulatory relief.
In June, the House passed Credit Union Bank and Thrift Regulatory Relief Act, which grandfathers in existing approvals of underserved areas and allows federal credit unions to apply to serve underserved areas outside their fields of membership. If the Senate does not pass it this year, lawmakers have to start the whole process again next year.
But given the public's overall wariness about the economy, Congress may not want to do any major financial deregulation.
"This provides a new set of challenges, we'll just have to meet them as best we can," said CUNA Senior Vice President of Legislative Affairs John Magill.
NAFCU Political Affairs Director Dillon Shea said a variety of factors are making passage of the measure a difficult challenge.
"The outlook in the Senate is not real good. We'll continue working for it, but it won't be easy," he said.
Another area where the impact of the changes at Fannie and Freddie will be felt in the campaign treasuries of lawmakers and the bank accounts of lobbying firms. The Treasury Department banned the firms from making any political donations or spending money on lobbying. Fannie and Freddie used those funds to stave off efforts to increase government oversight.
Since 1989, political action committees and individuals affiliated with Fannie and Freddie have given $19.5 million to federal candidates and committees, according to the Center for Responsive Politics, a research and advocacy group.
Among the recipients of contributions are: Rep. Spencer Bachus (R-Ala.), the senior Republican on the House Financial Services Committee, the Committee Chairman Frank and Rep. Paul Kanjorski (D-Pa.), who chairs the subcommittee that oversees Fannie and Freddie.
Democratic presidential nominee Sen. Barack Obama (D-Ill.) has received $103,899 from Fannie and Freddie employees, compared with $15,650 for GOP nominee Sen. John McCain (R-Ariz.).
The two companies have spent $180 million lobbying Congress during the past 10 years, including $7.4 million during the first six months of 2008.
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