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.