Fannie, Freddie fiction stores trouble for future
By Agnes Crane
Fannie Mae and Freddie Mac are escaping public wrath — and much in the way of accountability. That’s despite their 12-digit bailout and open spigot of U.S. taxpayer cash. The failure of the Obama administration and lawmakers to address the problem means the housing time bomb is still ticking.
The two U.S. housing finance giants piled fuel under the mortgage boom just as the much-criticized Wall Street banks did. Both groups helped inflate the housing market by taking big mortgage lending risks and then needed Uncle Sam to clean up the mess.
But Fannie and Freddie did so employing even higher leverage ratios. And more taxpayer money has been used to shore up each of the two agencies than was poured into Bank of America or Citigroup. The U.S. government has doled out $60.9 billion to Fannie and $51.7 billion to Freddie, and those numbers are likely to climb. Treasury’s investment in BofA and Citi capped out at $45 billion apiece.
Popular and legislative outrage, though, has remained focused on banks and insurer American International Group. That’s despite the Fannie and Freddie bailout being open-ended. Treasury on Christmas Eve quietly removed a $200 billion cap on each agency’s rescue funding, giving them a blank check from taxpayers for three years.
Despite their financial troubles, the two companies have been growing and now between them own or guarantee an eye-watering $5.3 trillion of America’s mortgages. They also remain publicly traded even after their effective takeover by the U.S. government in September 2008.
Yet their bosses haven’t testified in Congress since that same month, and lawmakers haven’t held a hearing to grill the companies’ regulator, the Federal Housing Finance Agency (FHFA), since October last year. By contrast, bank executives including Goldman Sachs’ Lloyd Blankfein were publicly lashed just this month.
Meanwhile, there don’t appear to be any independent overseers like Elizabeth Warren of the Congressional Oversight Panel and Neil Barofsky, the special inspector general, both of whom keep tabs on how Treasury is spending its $700 billion of Troubled Asset Relief Program funds.
True, Fannie and Freddie have a dedicated regulator. But the FHFA currently has an acting director, Edward DeMarco, who is a holdover from the regulator’s pre-bailout incarnation. And while an inspector general position was created 18 months ago, the White House hasn’t nominated anyone to fill it.
So why are blind eyes being turned? In the short term, it’s because Fannie and Freddie have been propping up the U.S. housing market by providing mortgage funding when fully private-sector banks couldn’t or wouldn’t.
But the two agencies’ Teflon existence goes back many years, despite accounting scandals and other shortcomings. They aren’t allowed to lobby any more, but in the past were hugely influential. In Washington they have long been treated, in effect, as piggy banks for subsidizing home ownership that are conveniently kept off the government’s balance sheet.
Democrats are especially fond of them, but Republicans haven’t been immune to their charms. It’s also a brave political call to speak out against entities associated with the promotion of home ownership, an aspiration dear to many Americans’ hearts.
With the two giant companies on intravenous government support, the issue should be coming to a head. In particular, there’s the knotty question of whether the administration really does now need to bring them officially onto its balance sheet.
President Barack Obama’s budget proposals next week should include words on their fate, but any detail is unlikely. Treasury Secretary Timothy Geithner has promised reforms, but not until 2011. Barney Frank, who chairs the influential House Financial Services Committee, wants to get rid of Fannie and Freddie in their current form but replace them — leaving wiggle room to maintain the status quo for a while longer.
In short, there’s little political will to torpedo the fictions and contradictions surrounding Fannie and Freddie: They’re private companies doing government work; they’re off the government’s balance sheet but backed by taxpayers; they’re subsidized but compete with the private sector; they’re regulated and too big to fail, but not kept in check.
Delaying the reckoning allows the systemic importance of Fannie and Freddie to keep rising, along with the danger of taxpayers facing a truly gigantic bill. Between bouts of Wall Street-bashing, Fannie and Freddie deserve their share and more of lawmakers’ urgent attention.