Fannie Mae and Freddie Mac — the giant housing finance corporations — have been garnering a rash of unwanted headlines as the gangs who can’t add straight.
First it was Freddie Mac which had to admit it had understated its income by a mere $4.5 billion. Even in the financial stratosphere of these government-sponsored enterprises, the accounting fiasco was a shocker. Enough of a shock for the board of directors to boot Freddie’s top executives out the door.
Last week, Freddie’s larger sibling — Fannie Mae — admitted that it had also made a major accounting error in misstating its stockholder equity by $1.1 billion. That, too, created a stir in the markets, but didn’t affect Fannie’s whopping $2.67 billion profits in the third quarter.
All of this created a small miracle by actually convincing the Congress that perhaps it had better take a serious look at the adequacy of regulation and oversight of Fannie and Freddie. Something of a radical thought for a Congress which has seldom gone beyond simplistic and syrupy praise of the two housing finance corporations as the saviors of the “American Dream” of home ownership. Notice the large television ad budgets of the two corporate goliaths on your screen.
Even after the accounting scandals, Congress has been hesitant to step too hard on the golden toes of Fannie and Freddie. After all, the GSE’s have always been extremely solicitous of Members of Congress, never failing to include them in well orchestrated press conferences called to announce home finance projects in their home districts. And not too surprising, the names of Fannie and Freddie executives and employees regularly and amply show up in the list of campaign contributions for members of the legislative branch.
So, it is not surprising that the House and Senate Banking Committees are at an impasse over reforms that might bring tougher regulation and sharper oversight of the giant corporations, each of which have a neat little taxpayer guarantee of a $2.25 billion draw from the U. S. Treasury should they fall on bad times. And the government guarantee is looked on by the financial markets as assurance that the two corporations would never be allowed to fail — an assurance which in turn enables Fannie and Freddie to save billions of dollars when they borrow money, increasing profits which line the pockets of private shareholders and pad the bulging pay envelopes of Fannie and Freddie’s executives.
In this world of high-finance and in the wake of the accounting scandals, Congress and the media frequently forget that the rationale for Fannie and Freddie—and the government subsidy on their borrowing is their presumed support of the affordable housing markets. Congress, in its reforms, needs to take a hard look at just how well this mission is being met. The housing mission should have a seat at the table alongside the accounting reforms.
Last month, Fannie Mae put out a lengthy report on the “Public Relations Newswire” designed apparently to brag about its housing efforts in the Washington, D. C. area. In the process, Fannie may have revealed more than it intended.
While heralding the fact that 200 new housing units had been authorized in each of eight D. C. neighborhoods this year, Fannie’s public relations release blandly noted that 265,000 low-income households in the Washington metropolitan area “have unaffordable housing cost burdents.” Here, in the home headquarters of its operations, where it is exempted from taxation by the District of Columbia, Fannie’s mission to support affordable housing seems to be hugely and severly lagging—by their own numbers.
Yet, the Fannie Mae release trumpets:
“The Fannie Mae Foundation creates affordable homeownership and housing opportunities through innovative partnerships and initiatives that build healthy vibrant communities across the United States. The Foundation is specially committed to improving the quality of life for the people of its hometown, Washington, D. C., and to enhancing the livability of the city’s neighborhoods.”
While Congress is unraveling accounting errors and financial misstatements, it might want to take a hard look at Fannie and Freddie’s claims on meeting its housing mission all over the country — the key public rationale for their existence.