(WASHINGTON, DC) -- If Rep. Barney Frank has anything to do with it, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) will be history by 2012. Both agencies are near financial death.
The Massachusetts Democrat, who chairs the powerful House Financial Services Committee, says he favors creating a whole new model to handle mortgage financing in the U.S.
"The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," Frank told a Congressional hearing Jan. 22.
Frank has some heavyweight support behind the measure.
In a PBS News Hour interview, Treasury Secretary Timothy F. Geithner said he doesn't think Congress will be able to pass legislation restructuring the companies until next year.
"We are committed to propose a set of detailed reforms beginning this year," Geithner said "...I don't think we're going to be able to legislate that until that process can start until next year, because it's just a complicated thing to get right."
Geithner added, "...We are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country."
In a December 2008 interview, Sheila Blair, chairman of the Federal Deposit Insurance Corp., said operating Fannie Mae and Freddie Mac as both a shareholder-owned company and a federal-related agency for over 70 years was a factor in their failure today.
Fannie Mae was set up by President Franklin Delano Roosevelt in 1938; Freddie Mac under President Richard M. Nixon in 1970.
Frank said he was instigating the death knell for Fannie Mae-Freddie Mac to save taxpayers further monetary burdens.
Fannie Mae posted $120.5 billion in net losses in the nine quarters ended in September and requested $59.9 billion in Treasury aid to remain solvent.
Freddie Mac has lost $67.9 billion and seeks $50.7 billion in additional taxpayer-funded aid. On Dec. 24, 2009, Congress approved a bill that would cover any of the agencies' losses through 2012 - lifting an earlier loss guarantee cap of $400 billion.
The two agencies received a total $110.6 billion in taxpayer money in 2009. They were seized by federal regulators in September 2008 as they neared financial collapse.
The Treasury Department took an 80 percent equity stake in each company. That move wiped out the majority of common and preferred share values at the two agencies. They have operated as shareholder-owned companies with a federally chartered mission to promote the housing market.
The two agencies buy mortgages from lenders, freeing up cash at banks to make more loans. They also make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.
The companies now own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made last year, according to Bloomberg.
Fannie Mae common shares, which peaked at $87.81 in December 2000, has currently fallen to about eight cents, or 7.5 percent, to 99 cents in regular New York Stock Exchange composite trading Friday, Jan. 22.
Freddie Mac, which reached an all- time high of $73.70 in December 2004, has dropped 14 cents, or 11 percent, to $1.17 per share.
According to Securities and Exchange Commission filings, Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each received $900,000 in salary for 2009.
They also will get $3.1 million in what is known as "deferred salary" that will pay out in four cash installments over this year, corresponding with the quarter it was earned in 2009.
The CEOs then each stand to earn at least another $2 million in cash if they met certain 2009 performance goals. It can be higher than that if they exceed the goals. That compensation will be paid out in 2010 and 2011.
Kevin Murphy
"There is no better example of the kind of misaligned compensation incentives that contributed to excessive risk-taking in the financial industry than those that were, and continue to be, in place at Fannie Mae and Freddie Mac," said Rep. Spencer Bachus, the top Republican on the House Financial Services Committee.
At the same time as Frank was announcing his thoughts on Fannie Mae-Freddie Mac, other House Republicans introduced a bill that would slice salaries of senior executives at the two agencies.
The bill would replace multi-million-dollar pay packages approved in December for senior executives at Fannie and Freddie, worth up to $6 million for some chief executives--about 15 times above President Barack Obama's $400,000 salary.
The top pay level for federal executives is currently set at $199,700.
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