Why are the Dems protecting Fannie Mae and Freddie Mac?
DNC Girlie Man
July 16, 2010 4:00 A.M.
Straight Talk on Fannie and Freddie
The GSEs should be brought on budget, then reformed.
Here’s one thing you won’t find in the 2,300-page financial-overhaul
legislation that passed the Senate Thursday afternoon: any serious
reform of housing giants Fannie Mae and Freddie Mac, the longtime
“government-sponsored enterprises” (GSEs), both of which have been in
federal conservatorship since September 2008. Last summer, the
Congressional Budget Office (CBO) estimated that the cost of
subsidizing the GSEs would amount to $389 billion through 2019. This
figure accounted for “substantial losses on the entire outstanding
stock of mortgages held or guaranteed by Fannie Mae and Freddie Mac at
that time.” In January, the CBO updated its forecast, projecting a
total price tag of at least $373 billion through 2020. By comparison,
it now expects the much-maligned Troubled Asset Relief Program to cost
just $109 billion.
Those numbers help put the GSE bailout in perspective, yet they tell
only part of the story. Fannie and Freddie currently own or guarantee
roughly $5.5 trillion worth of mortgages — over half the residential
market. If these liabilities were included in the federal budget,
Americans would better appreciate the true fiscal impact of rescuing
the GSEs.
But Fannie and Freddie are not counted in the budget, a maneuver
“worthy of Enron’s playbook, except not quite so hidden,” as Bloomberg
columnist Jonathan Weil has written. Their exclusion “makes a joke”
out of the U.S. balance sheet, says former SEC commissioner Paul
Atkins. The argument for bringing them on budget became even more
compelling in December, when the Obama administration removed a cap on
their Treasury Department credit line, essentially giving the GSEs a
blank check. A few months later, after House Financial Services
Committee chair Barney Frank (D., Mass.) suggested that GSE debt
obligations were not backstopped by the federal government, Treasury
spokeswoman Meg Reilly affirmed that “there should be no uncertainty
about Treasury’s commitment to support Fannie Mae and Freddie Mac as
they continue to play a vital role in the housing market.”
In other words, the GSEs enjoy a government guarantee, as they have
for many years. Before their 2008 collapse, that guarantee was
implicit; now it is more straightforward. Fannie and Freddie are fully
controlled (and mostly owned) by Washington; their mortgage activities
are sustained by U.S. taxpayers; and their bonds are widely considered
to be as safe (or nearly as safe) as Treasury bills. Despite the
housing meltdown, demand for GSE-issued securities has recently been
soaring. “The perception that these bonds are guaranteed by the U.S.
government,” notes the Wall Street Journal, “has been a lure to many
foreign investors.”
That perception is amply justified. Nevertheless, on May 17, 46
senators (all Democratic caucus members) voted against a
financial-reform amendment requiring the GSEs to be put on budget for
as long as they remain in federal conservatorship or receivership. The
measure, introduced by Idaho Republican Mike Crapo, would also have
reestablished curbs (at $200 billion apiece) on Treasury assistance to
the mortgage twins. It won the support of seven Democrats — Evan Bayh
(Ind.), Michael Bennet (Colo.), Russ Feingold (Wis.), Herb Kohl
(Wis.), Ben Nelson (Neb.), Mark Pryor (Ark.), and Mark Udall (Colo.) —
along with that of 40 Republicans (Alaska’s Lisa Murkowski did not
vote), but fell well short of securing the 60 votes necessary for
passage. Bayh and Feingold were the only two Democrats who joined all
41 Senate Republicans in backing the McCain-Shelby-Gregg amendment,
which would have set an expiration date for the Fannie/Freddie
conservatorship and launched a transitional process leading to the
termination of the GSEs’ government charters and subsidies. This
amendment was rejected on May 11, 43 to 56.
The lack of muscular GSE reform makes the Dodd-Frank bill a hopelessly
inadequate response to the 2008 financial crisis. While the
legislation does authorize Treasury to study ways of ending the GSE
conservatorship and changing the housing-finance system, it’s unclear
whether the Obama administration and top Democrats would be willing to
cut Fannie and Freddie loose.
Prior to the crisis, the GSEs operated under a perverse business
model: They could amass private profits with the aid of public
largesse and an implicit government guarantee that enabled them to
borrow money at low interest rates. In December 2008, mortgage-finance
consultant Edward Pinto, who served as Fannie’s chief credit officer
from 1987 to 1989, told Congress that “Fannie and Freddie went from
being the watchdogs of credit standards and thoughtful innovators to
the leaders in default-prone loans and poorly designed products. They
introduced mortgages which encouraged and extended the housing bubble,
trapped millions of people in loans that they knew were unsustainable,
and destroyed the equity savings of tens of millions of Americans.”
In a new paper, George Mason University economist Russell Roberts
points out that the GSEs bought roughly twice as many home-purchase
loans made to below-median-income buyers in 2003 as they had in 1997.
It was during this period — from the late 1990s through 2003 — that
“Fannie and Freddie played an important role in pushing up the demand
for housing at the low end of the market. That in turn made subprime
loans increasingly attractive to other financial institutions as the
prices of houses rose steadily.” From 2004 to 2006, Roberts adds,
commercial and investment banks played a larger direct role in the
subprime market than the GSEs did, though Fannie and Freddie were
still very active in the mortgage markets in ways that contributed to
the subprime problem. In 2006, they bought 390,000 loans with less
than 5 percent down, compared with just under 269,000 two years
earlier. In 2007, they purchased more than 608,000 such loans.
Today, after imploding and being seized by Washington, the GSEs
ostensibly have unlimited access to taxpayer assistance. At the very
least, their operations and liabilities should be incorporated into
official U.S. budget calculations. This is not a matter of left-right
politics; it’s a matter of fiscal candor. As economist Doug Elmendorf,
President Obama’s CBO director, told the Wall Street Journal back in
September 2008 when he was a Brookings fellow, “Trying to keep these
entities off the government’s books, given the government’s financial
commitment, would perpetuate the illusion that they aren’t the
government’s problem, even when they are.”
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Fannie Mae and Freddie Mac were on the center stage during the
financial collapse of 2008.
President GW Bush and Senator John McCain warned about Fannie and
Freddie in 2003.
The authors of the financial reform bill were Chris Dodd and Barney
Frank. Dodd and Frank were the biggest defenders of Fannie and Freddie
during President Bush's term in office. It's no secret Barack Obama
and Chris Dodd were the biggest recipients of campaign donations from
Fannie and Freddie.
Fannie and Freddie hold half the mortgages in the country. They're
just another financial collapse ready to happen.
( * )
What's the difference between a Democrat and a prostitute?
The prostitute gives value for the money she takes.
DNC Girlie Man
>On Fri, 16 Jul 2010 01:41:44 -0700, DNC Girlie Man
><limpw...@progressives.com> wrote:
>
>>Straight Talk on Fannie and Freddie
>>
>>The GSEs should be brought on budget, then reformed.
>
>Did you say that from 1994-2007?
>
>or from 2000-2009?
The financial reform bill just passed by Congress was written by Chris
Dodd and Barney Frank which does not apply to Fannie Mae and Freddie
Mac.