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JOHN E. SUNUNU

Fannie Mae, Freddie Mac: Learning to live with zombies

Simon Pegg and Nick Frost star in the 2004 film “Shaun of the Dead.”

New York Times

Simon Pegg and Nick Frost star in the 2004 film “Shaun of the Dead.”

There are legions of zombie movies, but arguments about the genre’s best modern offerings usually come down to two contenders: “Shaun of the Dead” and “Zombieland.” The latter boasts some fine action, an extraordinary cameo appearance by Bill Murray, and well-crafted rules for surviving Armaggedon. But, ultimately, “Shaun” takes the crown: Not only does it feature subtle humor and a better range of characters, but it also addresses the awkward situation in which the dangerous zombie happens to be your pal.

Coincidentally, that’s the same problem that Senate Banking Committee leaders Tim Johnson and Mike Crapo attempt to solve with new legislation to overhaul Fannie Mae and Freddie Mac. Like financial zombies, the two government-created mortgage giants have operated in the limbo of receivership for years. The US government controls their every move, while taxpayers still guarantee the mortgages they purchase. Meanwhile, with housing markets recovering, the firms are making record profits. Sure, they may still be infected by the moral hazard at the center of the financial crisis. But with cash flow like that, can we really afford to do away with them altogether?

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Since this is Washington we’re talking about, the answer is: “sort of.”

Like the latest zombie hit, “Walking Dead,” the Fannie-and-Freddie story has been a multi-episode event. Forty years ago, the two government-sponsored enterprises, or GSEs, offered local lenders the only alternative to holding mortgages on their own books. But today, that liquidity can be provided by at least a dozen large banks that securitize home mortgages, commercial loans, and other assets. When Fannie and Freddie were seized in 2008, many hoped to see them completely privatized in a year or two. That proved to be wishful thinking.

Eight months ago, Senators Bob Corker and Mark Warner got things rolling again with a proposal that would scale back government guarantees to cover only catastrophic losses and would require private-sector investors to shoulder more risk. Ten members of the Senate Banking Committee sponsored that original bill. Now, with Johnson and Crapo taking a similar approach, and with support from the White House and Treasury Department, chances for Senate passage are better than ever.

No zombie tale would be complete without some strange alliances forged in the heat of battle. On Capitol Hill, opposition to reform will come from two sources: liberal Democrats and Wall Street hedge funds. Liberals will mount a strenuous defense of the GSEs’affordable housing goals. That’s a laudable mission, but the US government has dozens of programs that subsidize housing, including discounted loans for first-time buyers, rental vouchers, and traditional low-income housing stock.

Wall Street types hoped to make a killing on shares in Fannie and Freddie that they purchased for pennies in the wake of the crisis. They’re betting on a return to the good old days of big dividend payments to stockholders, but that’s an unlikely outcome given that taxpayers paid out $185 billion to keep the companies operating after their collapse. Several hedge funds have gone so far as to file a federal lawsuit seeking to wrest control of GSE profits away from the US Treasury. The shares may hold some value after Fannie and Freddie are restructured, but in a battle between hedge funds and taxpayers, bet on Congress to side with the latter.

In the House, the Senate plan must confront conservative concerns that even a scaled-back government role exposes taxpayers to unnecessary financial risk. Although the plan would force private investors to cover losses before insurance kicks in, the perception may persist that mortgage securities are fully backed by Uncle Sam. The moral hazard created by such an under-pricing of risk could have dramatic long-term consequences — a scary movie we have seen before.

Another concern is that a minimal government role will grow back over time to include politically expedient new housing programs, ever higher levels of insurance coverage, and expansion into other business lines — all at public expense. The key to avoiding all this will be setting the right price for insurance premiums, establishing a high threshold for private-sector losses, and firmly prohibiting mission creep within the law. Look for all three to be part of any compromise between the two chambers.

In the end, the title character in “Shaun of the Dead” couldn’t give up on his best friend Ed, even after Ed turned zombie. Their happy, if unsettling, compromise was to turn the garden shed into a zombie shack where they could enjoy video games together once again. It didn’t stop Ed from trying to take a bite out of Shaun once in a while, but sometimes that’s the cost of friendship.

Let’s hope we can do better with our own financial zombies. It would be nice to look upon the mortgage industry without worrying about accidentally unleashing the next apocalypse.

John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.
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