The liquidation of Fannie and Freddie
Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., have proposed legislation that would liquidate (slowly wind down) Fannie Mae and Freddie Mac – now in receivership – and replace them with the Federal Mortgage Insurance Corporation, a public reinsurer similar to the Federal Deposit Insurance Corporation that guarantees bank deposits.
The FMIC will not offer a 100 percent guarantee of mortgage and interest payments on mortgage backed securities; the private mortgage issuers will be required to bear some of the risk. Investors will now have to determine the creditworthiness of the borrower, whereas with Fannie and Freddie’s total guarantee, investors didn’t know or care what they were buying. (Recall “liar’s loans” or “ninja” – no-income-no-job loans.)
In spite of the sub-prime crisis, which required a $188 billion bailout, F&F have once again virtually captured the entire residential mortgage market, guaranteeing close to 90 percent of all loans.
Fannie and Freddie are known as government-sponsored enterprises, which are established and chartered by Congress, yet privately owned, and offer financial services to the borrowing public and at the same time eliminate risk to the investors. A sweet deal and a recipe for disaster.
Given that it will take some time to wind down Fannie and Freddie, and that we still do not have a jobs recovery, the possibility of another economic downturn with another mortgage crisis cannot be ruled out.
All conservatives and many Democrats believe that the federal government’s presence in the private mortgage market needs to be greatly reduced. President Barack Obama supports the Corker-Warner bill in principle and predictably lays the blame for the sub-prime crisis only on the shoulders of the bonus-driven greedy crowd on Wall Street, ignoring the Department of Housing and Urban Development, which was created as a part of Lyndon Johnson’s Great Society scheme to develop pie-in-the-sky housing rules enforced by FDIC bank examiners.
The goal was to force lenders to improve home ownership to borrowers with low and moderate incomes at or below the median income for the market area in which they lived, and to increase loans to low-income borrowers living in underserved ZIP code areas.
Given that the private sector will now have skin in the game, the question remains about how much pushback these lenders will give if the rules and affordable housing goals aren’t amended. Obama is still a big government guy who believes in arm-twisting the private sector.
The current rules and analyses promulgated in 2004 were more than half the length of “War and Peace,” and covered 308 pages of the Federal Register.
There is no reason to believe that Obama wouldn’t agree to legislation liquidating F&F, and thus climate the risk to public finances, while at the same time shifting the burden of ill-advised loans to the private sector. He could demonize the private lending sector if they balk and look like a hero to his base. The question remains as to whether banks and other lenders will have the right to exercise sound business judgment. As it is, since 2008 more than 450 banks have ceased to exist because of aggressive enforcement of federal “affordable” housing goals.
The other shoe to drop is the reverse mortgage market that Fannie Mae has bundled and securitized also. They control 98 percent of this non-traditional market, which has less understood risk factors and is not getting much attention by legislators.
Government-sponsored enterprises are financial services corporations, so if they badly misjudge risk, the fallout could easily go global. (It isn’t as if a GSE were manufacturing solar panels and the market for them went south.) Moreover, GSEs are more easily subject to political pressure and fraud. Hundreds of politicians received campaign contributions from F&F, and yet it was the taxpayer who had to bail them out. With these hazards in mind, it makes sense to unwind these quasi-government creatures.
China has gone one better than U.S. GSEs with its state-owned enterprises. Corruption is rampant and an object lesson for us with our ever-growing government-centered economy. Astonishingly, outgoing President Hu Jintao in his last speech to the Communist Party delegates highlighted political corruption as one of the major challenges for the party.
The U.S. estimates SOEs account for about 50 percent of China’s GDP. Highly placed government officials have close ties to the most powerful state-owned enterprises and have placed their children, relatives and friends in leadership positions, and they profit by the millions. The U S. has similar problems with our political class and the revolving door with relatives as lobbyists or on the government payroll. China has both local and mega-SOEs, so the average Chinese citizen is aware of corruption on the local level (flashy cars, Hollywood lifestyle), and they are angry.
The average American is unaware of the corruption in distant Washington, D.C., or that Franklin Delano Raines – ousted chairman of Fannie Mae and Obama’s campaign economic advisor – took $90 million from the failed institution and departed just as an investigation was underway with a monthly pension of an astounding $114,393 for his life – yes, monthly – and then payable to his wife and children until 21.
Fannie and Freddie will not be missed by Republicans.
John Reiniers is a retired attorney and regular columnist who lives in Spring Hill.
