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Fannie and Freddie - Building on the House of Cards
by Bob Beauprez  
November 25, 2011 

The collapse of the sub-prime mortgage loan market precipitated the current economic recession. Yet three years and $170 billion in taxpayer funded bailouts later, Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises (GSEs) that owned or guaranteed the vast majority of those loans, remain virtually unchanged except that the giant is even bigger and more costly to maintain. 

Recently published reports of $12.8 million of annual compensation bonuses paid on top of already substantial salaries to ten executives at the two GSEs for achieving “modest goals” captured a few headlines and once again highlighted some of the paradoxes and problems of combining a supposedly privately owned and operated enterprise with conflicting public policy and politically motivated social objectives. 

While the public and most politicians are repulsed by bailouts and disparate executive compensation, little outrage is directed at the two biggest offenders, Fannie and Freddie. As pointed out by Investor’s Business Daily, of the $700 billion in TARP bailouts to private financial institutions, more than 97 cents of every bailout dollar either has already or is expected to be repaid. Meanwhile, Fannie and Freddie have sucked up $170 billion to stay afloat, and a recent CBO report to Congress projects the GSEs will need $51 billion more to survive over the next ten years. Only in government could failed management of this magnitude be deemed worthy of a bonus. 

President Obama, who blasted bonuses to other bankers as “shameful” and the “height of irresponsibility”, has been curiously silent. This is the same President who has had no problem intervening directly regarding compensation and management of other financial institutions that got federal bailout assistance. There will be “no more bonuses for companies that taxpayers are helping out” he said back in 2009, “as that would be a violation of ‘our fundamental values’.” 

Indeed, the Dodd-Frank financial reform behemoth signed by Obama grants expanded authority to the government to seize and control the management of banks, but the legislation is notably mute regarding Fannie and Freddie. 

Obama’s silent indifference also stands in stark contrast to the campaigning Obama of 2008 who stated, “I’ve always said that any action with respect to Fannie Mae and Freddie Mac needs to put taxpayers first, and can’t under any circumstances bail out shareholders or senior management of that company.” 

When pressed for a comment on the recently announced bonuses, all that the President’s spokesman Jay Carney would say was, “These entities are independent and therefore they are independent decisions. The White House is not involved, and nor should it be.” 

To pretend that Fannie and Freddie are “independent” might be a convenient dodge for Obama, but the troubled GSEs are anything but on their own. On September 6, 2008 the Bush Administration took both GSEs into federal conservatorship in a plan promoted by Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and Tim Geithner, then President of the New York Federal Reserve Bank. Accordingly from that point forward, the newly created Federal Housing Finance Authority (FHFA) controlled the GSEs rather than just provide regulatory oversight. In exchange for bailing out the mortgage giants the government got a majority ownership interest with a preferred stock equity position. In late 2010, the lame duck Democrat Congress removed the credit ceiling restraint previously imposed on the GSEs and opened the checkbook of the U.S. Treasury to unlimited credit advances to continually bailout Fannie and Freddie. 

While it might be politically convenient for Obama to pretend that Fannie and Freddie are untouchable independents, the agencies have been and continue to be vehicles of choice used by liberal Democrats to further an affordable housing objective and curry favor with the electorate. After all, who can object to a goal of more people owning their own home – until we all have to pay the consequences of too many of those loans defaulting? 

Key Members of Congress were concerned about the GSEs more than ten years ago. A highly critical report from the Office of Federal Housing Enterprises Oversight (OFHEO), then the regulator of Fannie and Freddie, precipitated hearings and calls from Congressional Republicans and the Bush Administration for more oversight. 

Democrats, particularly members of the Congressional Black Caucus, said the problem was with the regulator and not the GSEs. During a House Financial Services Subcommittee hearing in 2004 Gregory Meeks (D-NY) erupted with, “I’m p***ed off at OFHEO, because if it weren’t for you we wouldn’t be here in the first place.” Lacy Clay (D-MO) said the hearing amounted to “the political lynching of Franklin Raines.” Raines was then the CEO of Fannie Mae, and referring to the home mortgages held or guaranteed by Fannie Mae, he told Congress that “these assets are so riskless” that reserve requirements for potential loss was a non-issue. 

“We do not have a crisis at Freddie Mac, and in particular, at Fannie Mae,” Maxine Waters (D-CA) said during the hearing, “Everything in the 1992 Act (The Federal Housing Enterprises Financial Safety and Soundness Act) has worked just fine.” Waters agreed with her Black Caucus colleagues that OFHEO – not Fannie or Freddie – was the problem for blowing the whistle on the GSEs, and that Congress should be focused on regulating the regulator. “What we need to do is to focus on the regulator, and this must be done in a manner so as to not impede on the affordable housing mission.” 

With the legislation passed in 1992, Waters and her colleagues mandated the GSEs to “assist primary lenders to make housing credit available in areas with concentrations of low-income and minority families.” By 2000, HUD required 50% of the loans funded by Fannie and Freddie to go to low-income borrowers. 

Later, Waters pressured the GSEs to develop no-down-payment mortgages. “When you look at the philosophy behind down payments, it doesn’t make any sense anymore,” she said. “There are people who will never have a down payment.” By 2007 26% of all mortgages purchased by Fannie Mae were low or zero down payment. When significant numbers of these high-risk loans to minorities ended in foreclosure, Waters and her Black Caucus friends said it was because of “racism” and “reverse redlining.” The woman who led the fight to make loans available to virtually anyone who asked now blamed “predatory lenders” for pushing low-income borrowers into subprime mortgages they couldn’t afford. 

The obsession with ever more lax underwriting standards and ever greater affordable housing and home ownership objectives eventually led to the creation of the NINA (No Income/No Asset) mortgage at Freddie Mac. The NINA was created to accommodate “consumers who cannot, for whatever reason, provide personal financial information,” as explained in an internal 2004 memo directed to Richard Syron, the CEO of Freddie Mac. “Under this mortgage offering, borrowers do not disclose income or assets to the lender – the borrower’s ability to repay the loan is not analyzed or considered.” 

The Chief Risk Officer for Freddie Mac, David Andrukonis, warned Syron in 2004 of the risk of NINA loans, and recommended pulling the plug. Syron ignored the warning. “He said we couldn’t afford to say no to anyone,” Adrukonis told the New York Times. Freddie continued buying NINA loans until November, 2007. 

Rep. Barney Frank (D-MA), who has his fingerprints all over decades of the evolution of the GSEs and the financial dilemma that has resulted, is more candid about how liberal Democrats perceive Fannie and Freddie than Obama now wants to admit. In a 2010 CNBC interview, Frank, then the Chairman of the House Financial Services Committee with direct oversight responsibility for the agencies, said that Fannie and Freddie are essentially a “public policy instrument of the government.” Frank made it clear that he viewed the losses and billions in bailouts for the GSEs as just a cost of doing the business of government and affecting desired outcomes much like any other social program or entitlement. Dropping all pretense that the GSEs were private or independent agencies Frank said, “Remember now that Fannie and Freddie have been converted…part of the losses of Fannie and Freddie are that since the housing collapse, Fannie Mae and Freddie Mac…have become a kind of public utility.” 

Unlike Obama, Barney Frank is at least right up front with his politics, and doesn’t even pretend that Fannie and Freddie are – or ever should have been – anything other than a tentacle of the ever expanding federal government octopus. “They’re not what they used to be – that inappropriately hybrid, private stock company, public policy instrument,” Frank said during that same CNBC interview. 

There is much to consider in that statement and a good deal to learn. For decades, politicians have been using the tax code, regulation, and intimidation to force private institutions to implement public policy. Frank and his liberal colleagues like Obama obviously would prefer to drop the masquerade that a bright line still exists between public and private, and in the last three years they have relentlessly moved in the direction of more government control over the remains of the private sector, and in some cases and outright takeover of private sector functions. 

Less than a decade ago, Fannie and Freddie either made or guaranteed about 40% of the mortgage loans in the nation. Today, the two GSEs control 95% of the market. As recently as 2006, the private sector provided $2 for home mortgages or other consumer credit for every $1 provided by the government. Today, that 2:1 advantage has disappeared and the government now provides or guarantees more consumer credit (about $6.5 trillion) than the entire private market sources combined. As previously mentioned, Dodd-Frank gives the government unprecedented regulatory control over the remaining private sector banks. 

The government is in the car business having bailed out and taken ownership positions in both General Motors and Chrysler. If ObamaCare is implemented as currently planned, the government will have unprecedented control over the health care industry; 16% of the entire economy. With choking regulation from the EPA and Interior Department, the Administration has limited production of proven traditional energy resources while squandering billions on risky green energy adventures like Solyndra. 

In all of these cases and more, the government is taking increasing control over a once private industry to accomplish a public policy objective; something even Barney Frank acknowledged as an “inappropriate hybrid.” Unless the course is reversed – something with which Congress has a disastrous track record of accomplishment – the outcome will be the same as for Fannie and Freddie. As Frank might say, all of these intrusions by the government into the private sector would result in the creation of still more “public policy instruments” of the federal government. 

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