Few American corporations live a more charmed existence than Fannie Mae and Freddie Mac, the giant enterprises which dominate the nation’s housing finance markets.
As former entities of the federal government, Fannie and Freddie exist in a corporate twilight zone in which they rake in huge profits as private corporations without being required to sever their umbilical cords to the government. This arrangement allows them to continue to enjoy lucrative government subsidies, classic examples of corporate welfare run amuck.
The secret of Fannie and Freddie’s success at the government trough lies largely in the product that they support and profit from?housing. Housing is a critically important product right up there in the American psyche with apple pie and motherhood. The two government sponsored enterprises (GSEs) play heavily on the heart strings of this love affair with housing, describing their efforts as fulfilling the “American Dream.”
As a result, few hard questions ever get asked about the operations of Fannie and Freddie. They have always been coddled by Congress and usually lauded by the media. Both Republican and Democratic Administrations have played softball, at best raising questions around the fringes.
But all this “speak no evil” about Fannie and Freddie shows some signs of changing. Instead of simply accepting the “American Dream” propaganda, some hard questions are being asked about the depth of these GSEs’ support for affordable housing and just how much of the government subsidy is being pocketed by Fannie and Freddie’s executives and shareholders, rather than helping put people in homes.
A group of mortgage lenders and mortgage insurers have formed an organization called FM Watch which is raising a lot of questions about Fannie and Freddie’s favored position in the housing finance market. The organizers of FM Watch see Fannie and Freddie as potential competitors. Without question, they have an economic self-interest. Nonetheless, they are putting a spotlight on some dark corners of the GSEs.
Some taxpayer organizations more recently have formed an organization dubbed “Home Education” which is raising questions about Fannie and Freddie’s open access to government welfare.
Fannie and Freddie may minimize the effect of these attacks, but it will be harder for the GSEs to ignore voices that have recently been raised in the Congress an d the Executive Branch.
Federal Housing Administrator William Apgar is questioning Fannie and Freddie’s level of commitment to affordable housing. He dropped a large bombshell in a front page interview in the Washington Post in which he charged that Fannie Mae’s policies were damaging the ability of African Americans and Latinos to buy homes.
Representative Richard Baker, a Banking Subcommittee Chairman, has introduced a bill to reorganize and strengthen the regulatory machinery that oversees the GSEs and to eliminate the $4.50 billion dollar line of credit that Fannie and Freddie have on tap at the U. S. Treasury.
Much to the surprise of Fannie and Freddie’s watchers, Undersecretary of the Treasury Gary Gensler appeared before Baker’s Subcommittee and gave his endorsement to the elimination of the line of credit. That created an uproar among the executives of Fannie and Freddie and on Wall Street where the stock of both corporations dropped.
The Treasury line of credit is the golden link to Fannie and Freddie’s swollen profits. Noting the Treasury obligation combined with other links of the GSEs to the government, the market regards Fannie and Freddie as fail-safe enterprises, in effect guaranteed by the taxpayers. As a result, Fannie and Freddie are able to borrow in the market at virtually the same rate as the federal government. These links to the government have been estimated by the Congressional Budget Office as being worth at least $6.5 billion to the GSEs annually in savings on borrowings.
Despite the growing signs of concern about Fannie and Freddie’s free-wheeling operations and the access to corporate welfare, don’t expect change any time soon. This is an election year and Congress isn’t anxious take on the lobbying and political forces behind Fannie and Freddie.
More importantly, the GSEs are well known for mounting tough quick response teams?political swat teams?to quell opposition. Frank Raines, Fannie Mae’s chief executive, is the former director of President Clinton’s Office of Management and Budget with political friends on Capitol Hill and throughout the Executive Branch. From Raines on down, the executives of the GSEs read like a Who’s Who of the Washington power elite.
Jamie Gorelick, former Deputy Attorney General in the Clinton Justice Department, is Vice Chairman of Fannie. She collected $1,850,993 for just eight months of work after joining Fannie in May of 1997. Fannie’s board of directors includes people like Ken Duberstein, former chief of staff for President Reagan, Ann McLaughlin, Labor Secretary in the Reagan Administration and Jack Quinn, former counsel to President Clinton and later chief of staff to Vice President Gore.
Freddie Mac’s lobbying team has included former Minnesota Congressman Vin Weber, former Senate Banking staffer Ira Paull, Jim Smith, former Comptroller of the Currency and Assistant Treasury Secretary in the Nixon Administration and former California Congressman Richard Lehman. Among Freddie’s consultants has been former Speaker of the House Newt Gingrich.
Fannie and Freddie have donated more than $800,000 in soft money and other contributions to the Democratic and Republican parties in the current election cycle. In the first six months of 1999, the latest period for which figures are available, the two GSEs spent more than $4 million on lobbying expenses.
Clearly, reform isn’t just around the corner, not against the entrenched power of the GSEs. But the voices that have been raised are encouraging. With a concerted effort, we may be able to end this bit of corporate welfare and ensure that Fannie and Freddie live up to their charter to fully support affordable housing, rather than siphoning off government subsidies for their executives and stockholders.