Fannie and Freddie on Steroids
Hardly a reform, Johnson-Crapo expands government intervention in the mortgage industry.


John Berlau

A corollary to Shakespeare’s adage “A rose by any other name would smell as sweet” is that “garbage by any other name would smell as awful.”

The latter seems apropos to the “reform” of the government-sponsored housing enterprises, Fannie Mae and Freddie Mac, introduced by senators Tim Johnson, (D., S.D), and Mike Crapo, (R., Idaho) — the top Democrat and Republican on the Senate Banking Committee — and set to be marked up on Tuesday. A new letter signed by 26 conservative and free-market groups — including the Competitive Enterprise Institute, Club for Growth, FreedomWorks, Americans for Tax Reform, National Taxpayers Union, and the American Family Association — argues that Johnson-Crapo “does not constitute real reform, but an expansion of the type of government intervention that fueled the housing crisis in the first place.”

While the media often characterizes this plan as “ending” Fannie and Freddie, most of the two government-sponsored enterprises’ functions would simply be transferred to a new giant government entity, the Federal Mortgage Insurance Corporation — or what we might call Feddie Mic. Not only would the government’s role in subsidizing and micromanaging housing not be reduced, in many ways it would be substantially increased.

Further, the legislation would create an explicit taxpayer guarantee of the government-sponsored enterprises’ $5.6 trillion in debt, and housing “trust funds” would be created anew within Feddie Mic. These trust funds, a brainchild of former representative Barney Frank (D., Mass.), are potential slush funds for politically motivated “housing advocates” such as the now-defunct ACORN.

Worst of all, and sending the worst possible signal to the potential private-sector investors who are needed for a private housing market to thrive, Fannie and Freddie’s shareholders would be wiped out permanently under the bill’s Section 604.

Fannie was created as a government agency in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later. Even though they had private shareholders, they always retained government privileges: They were exempt from state and local taxes, and, importantly, each had a $2 billion line of credit with the U.S. Treasury.

Back in 2000, the Competitive Enterprise Institute’s founder, Fred Smith, predicted in his testimony before Congress that “as long as the [government] pipeline is there, it’s very expandable. . . . It could be $200 billion tomorrow.”

Many dismissed Smith’s prediction at the time, but it turns out he underestimated the ultimate tab to taxpayers for the bailout orchestrated by the Bush administration, which put the GSEs under conservatorship at the height of the financial crisis in 2008. While the Obama administration estimates the cost at $188 billion, the Congressional Budget Office’s “fair value” accounting puts it at $317 billion.

But the real cost to taxpayers came from Fannie and Freddie’s role in partnering with banks in issuing new subprime mortgages. As documented in the groundbreaking book Reckless Endangerment, co-authored by New York Times’ Pulitzer Prize–winning business columnist Gretchen Morgenson and financial analyst Joshua Rosner, the GSEs had key roles in providing invaluable assistance to bad actors in the private sector, including the notorious Countrywide Financial.

The American Enterprise Institute’s Peter Wallison, a commissioner of the congressionally created Financial Crisis Inquiry Commission, points out in a Wall Street Journal op-ed that in September 2008, “half of all mortgages — 28 million — were subprime or otherwise risky and low-quality,” and of these, “74 percent were on the books of government agencies, principally the GSEs.”

After years of minimizing the role Fannie and Freddie played in the crisis, many liberals as well as longtime housing “subsidy suckers” (in the parlance of the intrepid Washington Examiner columnist Timothy P. Carney) in the real-estate and construction industries are hailing the Johnson-Crapo “reform” and saying the GSE model has “failed.” But it’s important to understand why they believe it has failed. Incredible as it may seem, they believe the GSEs are being too stingy and see Johnson-Crapo’s proposed Feddie Mic as a way of prying open government-backed credit spigots even further.


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