The Future of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are the envy of the corporate world. When it comes to corporate welfare subsidies and implicit government guarantees—they are in a league all to themselves. Increasingly, the two corporations dominate the mortgage finance market and largely dictate the terms and conditions on which home buyers may obtain shelter—while using their links to the federal government to enrich their private stockholders, officers and directors.
Any substantive criticism of this cozy juxtaposition of government subsidies and private profits triggers the immediate deployment of lobbying swat teams from the two government sponsored enterprises to quell any idea that change is needed. Fannie Mae, in particular, is quick to unleash its well-financed public relations and political muscle against anyone or any group that raises a serious negative question about its operation.

Embarrassed by its surrender during the 1980s to the savings and loan industry and fearful of a repeat in other financial sectors, Congress did adopt some limited reforms for the government sponsored enterprises in 1992, establishing machinery to monitor Fannie and Freddie’s contribution to affordable housing and a separate agency as regulator for safety and soundness. Despite some well-meaning administrators, these efforts remain incomplete and underfunded and receive only timid support from a Congress fearful of stepping too hard on the toes of its friends at Fannie and Freddie. Fannie and Freddie have learned to live with the 1992 reforms without drastically changing their approach or
their profits.

Fannie and Freddie provide a classic story of what happens in a democracy when a commendable goal–such as the provision of housing–is corrupted by power and greed and, most of all, by lack of accountability. Both Fannie and Freddie were originally government instrumentalities designed to boost financing for housing. Ultimately, both were moved out of government and given “private” charters which did not sever fully their umbilical chords to the federal government.

Despite their seeming invincibility, some storm clouds have been forming over the GSE’s corporate horizon in recent months. It is far too early to know whether these clouds will produce storms that will uproot long-standing policies at Fannie and Freddie and produce better and more equitable protections for the taxpayers and the seekers of homes at affordable prices.

Here are some of the forces at work that may affect the future of Fannie Mae and Freddie Mac.

  1. FM Watch, a recently formed industry group dominated by banks, insurance companies and other financial institutions. They see Fannie and Freddie as competitors which use quasi-government powers to encroach on the private sector role in the mortgage market. The group is staffed and well financed and is having an effect on Capitol Hill and in the media. The big shortcoming in the credibility of this organization, especially for housing and community groups, is the fact that big players in FM Watch have a poor record of serving affordable housing needs of low and moderate income families. In addition, many of FM Watch members contribute large sums to financial trade associations which actively oppose efforts under the Community Reinvestment Act (CRA).
  2. The House Banking Committee where Representative RichardBaker, a rising Republican star on the Committee, has introduced legislation that would curb Fannie and Freddie and has conducted well-publicized hearings that highlighted a host of GSE shortcomings. How far Baker will push his efforts is still a question, but at the moment he is the most painful burr in the side of Fannie and Freddie. Even a bigger question may the ability of Baker to gain support from the incoming Administration of George W. Bush.
  3. The Federal Reserve Board Chairman has written, in answer to Baker’s inquiries, two letters which raise questions about Fannie and Freddie’s competition with private lenders and the degree to which government subsidies are passed on to home buyers. Greenspan, riding the crest of a popularity wave, adds new heft to Baker’s efforts and increased media coverage of the issue. However, many wonder whether Greenspan wrote the letters as a political move to curry favor with a prominent Banking Committee Republican, rather than in a real effort to fan the flames for GSE reform.

A countervailing force is the fact that many senior Democrats in both the Senate and House sought assignment to the Banking Committees because of the Committees’ housing and urban development jurisdiction. Many of these Democrats readily accept the often stated, but never proven, claim by Fannie Mae that any change in the GSE’s status would raise the cost of housing. Some middle-level Democrats like Representative Ken Bentsen of Texas, however, have raised questions about Fannie and Freddie and many of the junior members have stayed out of the fray. So, the ultimate party split on GSE reform is still a question mark.

The support among the Democrats for reform may hinge largely on how strong a case can be made that Fannie and reddie are failing to meetaffordable housing needs, particularly in low income and minority areas. A key quid pro quo for the GSE’s continued existence as free-wheeling users of the government’s credit has been support for affordable housing. If oversight hearings establish that Fannie and Freddie are falling short in this area, the tide could rise for basic reforms in the public interest.

These reforms should ensure that:

  1. any government subsidy is passed on to homebuyers, not pocketed by Fannie and Freddie shareholders or used for public relations, excessive executive compensation or political purposes;
  2. housing goals are set high enough to end the continuing shortfall of affordable housing and that these goals are rigorously enforced;
  3. patterns of purchases of home mortgages by Fannie and Freddie are non-discriminatory;
  4. capital standards and regulatory oversight are sufficient to protect taxpayers against bailouts;
  5. Fannie and Freddie’s charters are amended to clarify the role of the GSEs in housing and that oversight is sufficient to ensure that the companies do not stray from their assigned mission.

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