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The Obamacare of Real Estate

3:01 PM, Mar 18, 2014 • By JAMES K. GLASSMAN
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Top Senate Banking Committee members released plans this week to wind down mortgage giants Fannie Mae and Freddie Mac and replace them with a complicated apparatus disturbingly similar to Obamacare.

While the proposal by Senators Tim Johnson (D-SD), the chairman, and Mike Crapo (R-ID), the ranking member, was announced with great fanfare, it simply follows the outlines of another bipartisan bill, offered last year by Sens. Bob Corker (R-TN) and Mark Warner (D-VA). The idea is to get rid of the two government-sponsored enterprises (GSEs) that provide mortgage financing today for most American homes and replace them with a system of private lending with securities explicitly backed by the federal government.

In going through contortions to reinvent the housing finance system, the senators have avoided the obvious solution: keep the basic platform that has generally served American homeowners well but reform it to reduce risks. Instead, Johnson and the others have come up with a contraption that resembles the Affordable Care Act in its convolutions and its potential for unintended consequences.

It’s hard to understand why legislators think that government can restructure this one-sixth of the economy any better than they are restructuring the one-sixth represented by health care.

But the problems with Johnson-Crapo-Corker-Warner don’t end there. The legislation would also add $5 trillion to the liabilities side of the federal balance sheet and tempt ratings agencies to demote government bonds again. And, in defiance of the rule of law, the senators blithely strip shareholders of all their assets in two major businesses. This is behavior you expect in Venezuela, not in the United States, and it will certainly lead to an erosion of investor confidence.

Some history is in order. Fannie started as a federal agency in 1938 and went public in 1968; Freddie sold stock in 1989. Partly because Congress pressured the GSEs to back riskier mortgages with inadequate capital, the two got into deep trouble in 2008 and helped spark the global financial crisis.

The federal government stepped in with a rescue that totalled $187 billion. After reforms were imposed, Fannie and Freddie emerged from the disaster sound and profitable. They have already repaid $185 billion to the Treasury and later this month are scheduled to add $18 billion more, giving taxpayers a solid profit. Without dividends from Fannie and Freddie, the federal deficit last year would have been greater by nearly one-fifth.

For its bailout funds, the Treasury five years ago received common and preferred stock, and the assumption was that, when taxpayers got their money back (plus a nice profit), the feds would exit as shareholders. Fannie and Freddie would then continue to operate as stock companies with stronger regulatory safeguards, less political interference, more capital, and (many of us hoped) an end to the implied government guarantee on their debt.

The original deal required Fannie and Freddie to repay the Treasury with a 10 percent annual dividend, but the government unilaterally changed the terms in 2012 to something called a “net worth sweep,” with all profits each quarter going to the Treasury.

Citigroup, AIG, and other recipients of bailout funding paid back what they owed, and those companies still exist – and, in most cases, thrive – with private capital provided by large and small shareholders and lenders. Fannie and Freddie, on the other hand, are zombies, stripped of their capital, with shareholders hanging on in hopes that the feds will come to their senses and abide by the rule of law.

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