Commentary—

Fannie And Freddie — Still Defying Reform

By Ryan Alexander

As the economy continues to sour and the housing market sputters, lawmakers stand ready to unleash their response: a financial bailout. After losing more than 50 percent of their stock value in a week, Fannie Mae and Freddie Mac are the latest suitors and Congress has promised to get this package done in time for August [the House and Senate passed the bill last week; President Bush signed it into law July 30]. But considering this deal could put taxpayers on the hook for tens of billions of dollars in losses, if not more, it is critical to attach some strong strings to this hastily arranged bailout.

Fannie and Freddie are exotic creatures. They are “sponsored” by the federal government. They are not federal agencies and are technically not backed by the full faith and credit of Uncle Sam. But everybody knew they had gotten so big the feds could not allow them to fail. Between the pair, they hold more than $5 trillion worth of the estimated $12 trillion of US mortgage debt, and more than 90 percent of the loans less than $417,000.

Fannie and Freddie buy mortgages and then either hold them or package them as mortgage-backed securities and sell them to investors. The idea behind these companies was that by purchasing mortgages from lenders and repackaging them, more money would be back in the lending market to make more loans.

So it is not surprising when you hear about mortgage failures and Americans suffering foreclosure that a lot of those loans are on the books of these behemoths. But considering their size, it is pretty clear that allowing entities this large to fail would deal an enormous blow to our economy. Earlier this year, the Federal Reserve stepped in to help avoid a failure of Bear Stearns, an investment bank. That $30 billion loan to J.P. Morgan to complete the deal is small potatoes by comparison.

Years of lackadaisical oversight and lack of regulatory control got us in the mess we are in. And by all accounts, we have to do something. The plan floated by Treasury Secretary Henry Paulson would allow Fannie and Freddie to borrow an unspecified (aka unlimited) amount from the Treasury, up from the $2.25 billion limit each has today. In addition, the federal government would be able to buy the companies’ stock.

For years, Fannie and Freddie have been furiously fighting scrutiny by the federal government and efforts to shrink their role. Company stalwarts quickly labeled opponents as anti-homeowner or elitist. To protect their turf, the companies have doled out more than $170 million in campaign cash over the last decade. But it is hard to have one hand out while the other tries to stiff-arm the Federal Reserve from reviewing their books.

Let’s be clear. No matter what anyone says, this is not about helping homeowners or preventing foreclosures. Nobody’s existing mortgage is going to be affected by this. This is about bailing out two companies that have gotten too big for their fiscal britches. And this is going to help their shareholders and makes a mockery of the fig leaf that Fannie Mae and Freddie Mac are independent companies not backed by the federal government. At the end of the day, this may be the tough medicine the taxpayer has to take to help the economy, but we have to get something in return.

No matter what happens — even if a bailout is avoided — strong strings must be attached. Fannie and Freddie are going to have to shrink and they are going to have to be overseen by the Federal Reserve. In writing the bailout package, Senator Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, said that he was “determined to do this early but more determined to do it right.” We sure hope so.

 

(Ryan Alexander is president, Taxpayers for Common Sense, a nonpartisan federal budget watchdog. www.taxpayer.net )