Fannie Mae/Freddie Mac

Once more a report from the Congressional Budget Office (CBO) has raised big questions about how much of the federal government’s generous subsidy to the housing finance giants?Fannie Mae and Freddie Mac–finds its way into housing, particularly affordable housing for low and moderate income families.

In 1996, CBO estimated that Fannie and Freddie received $6.5 billion in subsidies created by their various links to the federal government. Only two-thirds of the subsidy was actually passed on to home buyers by Fannie and Freddie, CBO said. CBO has released a new study which shows that the subsidy is now a whopping $10.6 billion with an estimated 37 percent being diverted for private stockholders, the corporations’ executives and lobbyists and political contributions.

Various benefits that Fannie and Freddie receive from the federal government?including a combined contingency fund of four and one-half billion dollars at the U. S. Treasury?allows the two Government Sponsored Enterprises (GSEs) to borrow money in the market at almost the same rate as the U. S. Treasury, something that no competitor could come close to matching.

The new CBO report showing larger subsidies for the GSEs, puts the heat on many progressive Members of Congress who have frequently defended Fannie and Freddie because of the GSE’s presumed importance to
housing finance. And Fannie and Freddie, of course, operate massive public relations, advertising and lobbying campaigns to promote the idea that they are expending the maximum resources to promote housing
including low and moderate income units.

But questions are sure to grow with the publication of CBO’s new findings of bigger and bigger subsidies enjoyed by the GSEs. Nicolas Retsinas, former Assistant Secretary of Housing and Urban Development in the Clinton Administration, says “it is fair to ask whether they (Fannie and Freddie) are doing enough to warrant the support they receive from the federal government.”

Not only does Congress’ weak oversight encourage under achievement by the GSEs on low and moderate income housing, but it also obscures the need for better regulation and accountability by Fannie and Freddie.

Representative Richard Baker, Chairman of the Capital Markets Subcommittee of the House of Representatives Financial Services Committee is an exception to the “see no evil, hear no evil” attitudes which pervade what passes for Congressional debate about the GSEs. Baker has been a burr in the side of Fannie and Freddie, conducting not only oversight hearings, but introducing a broad package of reforms that
would strengthen regulation.

Congress has an unfortunate habit of looking the other way in the oversight of financial institutions that are carrying out a housing finance mission, something that is regarded — accurately or not — as akin to motherhood and apple pie. Certainly that was true with the savings and loan industry which lived a charmed life on Capitol Hill until the industry self-destructed under weak regulation, leaving taxpayers facing a $500 billion tab including interest for a bailout.

Hearings on GSE regulation in both the House and Senate Banking Committees have deteriorated into a bi-partisan contest to see which Member of Congress could come up with the most fulsome praise for Fannie
Mae and Freddie Mac.

The immense size, alone, of Fannie and Freddie should be enough to dispel Congressional apathy about regulation. Lending by Fannie and Freddie combined totaled $2.1 trillion in 2000. GSEs dominate the home mortgage market and have more than 70 percent of the conventional fixed-rate single-family market and are expected to have nearly one half of all home mortgages in the U. S. by the end of 2003. And what should
put a shiver through all the bank regulatory agencies is the fact that commercial bank holdings of GSE debt represent over one third of total bank capital. Forty percent of commercial and savings banks have invested 100 percent or more of their capital in GSE securities, according to data compiled by Representative Baker.

There is a lot at stake in the debate over GSE regulation including tax dollars and critically important housing policy. With few exceptions, the Members of the House and Senate Banking Committees are playing chicken on the issue. Citizens need to let their Representatives and Senators know that they want reform now, not after another savings and loan-style disaster.

They also need to insist that the government subsidies which have been so freely accorded Fannie and Freddie are returned in the form of financing for badly needed low and moderate income housing.