The abuse of Fred­die and Fan­nie Mae

More re­forms are needed to make the first ones work

The Washington Times Daily - - EDITORIAL -

Fred­die Mac and Fan­nie Mae al­most took down the U.S. econ­omy by trans­form­ing bad mort­gages into some­thing that looked valu­able, but were any­thing but. The ex­tra­or­di­nary bailouts that fol­lowed put ev­ery­one, for one good rea­son and an­other, shak­ing in their boots.

It was a cri­sis that was a long time com­ing. Grad­u­ally, year by year, var­i­ous in­sti­tu­tions of the U.S. gov­ern­ment had en­abled the cre­ation of in­sti­tu­tions that be­came “too big to fail.” Fred­die and Fan­nie were Ex­hibit A. The much lamented Dodd-Frank leg­is­la­tion pur­ported to ad­dress this prob­lem, and that failed, too.

Af­ter the crash Fred­die and Fan­nie were put into a kind of fed­eral re­ceiver­ship. Fred­die and Fan­nie Mae were to mend their ways so as to never again put tax­pay­ers on the hook for losses, and they were to pay back the bailouts on a reg­u­larly sched­uled ba­sis.

The full re­pay­ment of the bailout is the only thing that’s hap­pened as it should. But be­gin­ning in Au­gust 2012, the U.S. Trea­sury de­cided that good enough was not re­ally enough. The Trea­sury be­gan seiz­ing the con­sid­er­able prof­its Fred­die and Fan­nie gen­er­ated each quar­ter, and that be­came the prob­lem. Fan­nie and Fred­die have stock­hold­ers, who were en­ti­tled to a re­turn on their money, in­vested in good faith, and the seizures nat­u­rally made them un­happy. Now they’re su­ing, ar­gu­ing that the U.S. Trea­sury had no right to seize what was rightly not theirs.

The stock­hold­ers ar­gue that the bil­lions the U.S. Trea­sury seized ac­tu­ally be­long to the stock­hold­ers. The gov­ern­ment says it only did what it had to do, tak­ing prof­its above the agreed on 10 per­cent fixed an­nual div­i­dend. Fred­die and Fan­nie were in “a death spi­ral,” and the gov­ern­ment, as it al­ways does, said it was only do­ing what was good for ev­ery­body.

All that will pre­sum­ably be worked out in court, not nec­es­sar­ily to ev­ery­one’s sat­is­fac­tion, but there’s still no re­form. What started as a mess is still very much a mess. In the pre­vi­ous Congress, Rep. Mick Mul­vaney, who is now the direc­tor of the Of­fice of Man­age­ment and Bud­get, in­tro­duced leg­is­la­tion that would have re­turned con­trol of Fred­die and Fan­nie to its stock­hold­ers and man­agers, free­ing it from gov­ern­ment con­trol.

The promised fun­da­men­tal re­forms to Fan­nie and Fred­die, nec­es­sary to pre­vent gov­ern­ment-spon­sored en­ter­prises from once again “pri­va­tiz­ing gain and so­cial­iz­ing losses,” haven’t hap­pened. Re­forms are es­sen­tial. The pri­vate sec­tor should take on much more of first loss risk be­fore it makes the gov­ern­ment’s books. This can be done by ex­pand­ing the use of pri­vate mort­gage in­sur­ance to cover 50 per­cent of losses on mort­gages pur­chased and “se­cu­ri­tized.”

It’s im­por­tant that Hous­ing Sec­re­tary Ben Car­son pay per­sonal and close in­ter­est in this. The bad al­ter­na­tive to con­ven­tional mort­gages sold to Fred­die and Fan­nie are loans guar­an­teed 100 per­cent by the U.S. tax­payer through the Fed­eral Hous­ing Ad­min­is­tra­tion. Mr. Car­son did the right thing when he sus­pended Barack Obama’s last minute fee re­duc­tion that would have un­der­cut the pri­vate mar­ket. He should fur­ther re­form FHA to limit the FHA foot­print and the tax­pay­ers’ ex­po­sure.

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