Private shareholders of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have been encouraged by the failure of the Crapo-Johnson proposal to gain traction, but according to Treasury Under Secretary Mary Miller their demand for the recapitalization of the GSEs simply isn’t realistic.

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Fannie, Freddie reform critics avoiding difficult decisions, says Miller

“Critics of reform would suggest that we can simply recapitalize the GSEs and avoid difficult decisions around creating a new system,” said Miller, reports Timothy Ahmann for Reuters. “Even if truly rehabilitating the GSEs were possible, recapitalizing them adequately would take at least 20 years.”

Miller argues that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have had what appears to be a great couple of years because of non-recurring events including tax adjustments and a string of high profile legal settlements. The Congressional Budget Office has backed this view, saying that the GSEs are cash flow positive but not actually profitable on a fair value basis, while the Office of Management and Budget considers them to be profitable. She also says that taxpayers would be at risk of going through another round of bailouts if there is another downturn or other shock during that twenty year period.

Still no replacement for Fannie and Freddie

Technically, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are in a state of conservatorship, meaning that the Federal Housing and Finance Agency is responsible for restoring them to financial health. But net income sweeps instituted by the US Treasury has made that impossible, in line with the Obama administration’s policy of winding down the GSEs and replacing them with something else.

A big part of the long investment thesis on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is that this plan isn’t tenable. Whether the administration has the right to wind down the GSEs is being disputed in a number of court cases, but even assuming that it does, Congress is responsible for creating whatever new agency replaces them or for expanding the mandate of an existing agency such as Ginnie Mae to take their place.

If that doesn’t happen, then losing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will put thirty-year fixed-rate mortgages out of reach for middle class Americans. Rafferty Capital Markets VP of equity research Richard Bove, for example, argue that either this administration or the next will have to change course because to protect the US housing market.