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Sanity, Honesty and Respect for the Rule of Law Are Needed in Housing Policy

The Wall Street Journal is seen as the bible of free markets, prudent management and the rule of law. So, its January 9 editorial that dismissed Fannie Mae and Freddie Mac shareholders’ rights and tried to preempt the incoming Trump Administration from doing anything short of dismantling the companies was stunning.

The paper assigned cynical intentions to Treasury Secretary-designate Steve Mnuchin’s statements that it was time to get Fannie and Freddie out of government control and restructure them so they are financially sound and never again need an infusion of taxpayer money. Putting aside the ad hominem argument that Mnuchin must be scheming to help Wall Street firms because he worked at Goldman Sachs, the Journal omitted important facts and got other facts wrong.

The Journal pointed out that Fannie and Freddie received almost $190 billion of taxpayer money in 2008 when it appeared they could collapse and then asserted, “Not unreasonably, taxpayers now receive all of their profits. But the private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them.”

Well, it is unreasonable. Under the Net Worth Sweep, Fannie and Freddie have surrendered to Treasury some $70 billion more than the original so-called bailout sum. This policy goes directly against what the law that created the conservatorship stipulated. It is an illegal taking of property – hence the ongoing litigation by shareholders. It has also forced the companies into the perilous position of having inadequate backup capital.  How is it reasonable to rake up profits that should belong to shareholders? How is it reasonable to expose taxpayers to another bailout if the housing market sinks?

Fannie and Freddie had a fairly good run as publicly-chartered and privately-held companies until the late 1980s, when a mix of bad management, government mandates and lax regulation undermined their original mission. Until then, investors and homebuyers benefitted from the existence of the companies. It is speculation to assert there would be no takers for the securities the reformed and restructured government sponsored enterprises would offer.    

No one denies that changes in housing finance were – and continue to be – needed following the financial crisis of 2008. A smaller, more clearly defined role for government may well make sense. But the law required restoring the companies to a solvent position first. Instead, the Obama Administration’s Treasury Department decided to use Fannie and Freddie’s profits as a piggy bank and Congress failed to come up with a viable alternative to them.

The Journal’s assertion that Mnuchin will adhere to the “mythology” of the 30-year fixed-rate mortgage was pure speculation. Its discussion of this finance product was also factually flawed. First of all, it dismissed Fannie and Freddie’s role in creating the kind of stability and liquidity in the home finance market that allowed for the creation of the 30-year mortgage. But to back up its view, the editorial cited a recent op-ed by former FDIC Chairman William Isaac and former Wells Fargo Chairman Richard Kovacevich which explained, “Nonconventional or ‘jumbo’ 30-year mortgages not guaranteed by Fannie and Freddie have existed for decades. In the decade preceding the financial crisis, the interest rate on these jumbo mortgages averaged only about 0.25% higher than similar guaranteed mortgages, a difference of a little over $40 a month on a $200,000 mortgage.”

But here is a critical distinction in finance products the Journal conveniently ignored.  “Jumbo” mortgages are nonconventional by their very nature – they are too large to fit within Fannie and Freddie’s conforming loan limits, so they cannot be guaranteed by the GSEs in the first place.  They are products marketed for a very specific and exclusive segment of the population, not the constituency that Fannie and Freddie are mandated to serve. Using the availability of these jumbo loans to argue that there is no need whatsoever for a government role in housing finance availability is like saying that there’s no need for public housing because there are waterfront apartments available in Georgetown.

 If the new Administration wants to bring the Fannie and Freddie conservatorship fiasco to an end, everyone should be encouraged. But a sane approach starts with acceptance of facts and adherence to the law. That means ending the New Worth Sweep and then dealing with properly capitalized companies in a way that honors obligations to shareholders, protects taxpayers from future rescue missions and maintains affordable finance options for working Americans.