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The Washington Post Also Got a Lot Wrong in Parting Shots at Fannie and Freddie as 2015 Ended

As we noted yesterday, the Wall Street Journal’s final editorial of the year had a lot of flawed assumptions and assertions about the conservatorship of Fannie Mae and Freddie Mac. As 2015 came to a close, the Washington Post also weighed in with an error-ridden editorial.

It was obvious the Post needed to do more reporting on Fannie and Freddie before impugning the motives of groups that have called for the GSEs to be recapitalized. Almost every sentence of its December 20, 2015 editorial on the Fannie Mae and Freddie Mac saga was wrong.  We will confine our forensics to the most jaw-dropping lapses in reason and misunderstanding of facts.

First, the Post cast its jaded eye on the hedge funds, which it dubbed “hedgies,” and low-income housing advocates who argue for recapitalizing and releasing the GSEs.  The paper suggested there is something nefarious about seeking a profit on investment or something “misguided” (the Post’s word) about standing up for the federal mission to facilitate access to affordable housing – something that has had bipartisan support for 80 years.

Fannie and Freddie are private companies. Amid the financial meltdown seven years ago, federal officials assured that these enterprises were good bets for the long run and moved in dramatic fashion to prevent them from failing. Once the GSEs returned to profitability, investors and shareholders hoped and expected for a profitable return.  Surely, the Post’s new owner, Jeff Bezos, is not undertaking changes at the Post in the hopes of decreasing profits for himself and other shareholders.  Making a profit is what private companies set out to do.

As for access to affordable housing, if this is “misguided” federal policy, then why did the editorial call for replacing the GSEs with “…a new system of mortgage finance relying on the private sector to handle more of the risk while directly subsidizing legitimate low-income housing as needed?” 

Second, the Post dismissed “all the harrumphing about shareholder property rights and helping the poor.” Harrumphing suggests priggish, self-righteous indignation over something relatively minor. In fact, what has happened to shareholders deserves more than a harrumph.  It merits an investigation by the “paper of record” in the nation’s capital, not the occasional stories we have seen during the last few years that seem to agree that Treasury officials were simply looking out for taxpayers. The same is true for the poor.  As President Obama starts the final year of his presidency, housing for low-income Americans remains a stubborn challenge.

Congress passed a law (the Federal Housing and Economic Recovery Act of 2008) which mandated that Fannie and Freddie be put into a conservatorship in or order to be made “sound and solvent” and returned to their roles of providing liquidity in the secondary mortgage market.  Instead, as soon as the GSEs became profitable, Treasury officials engineered the “Third Amendment Sweep” in 2012 and have sucked up the GSEs’ revenues ever since – now over $50 billion in excess of what taxpayers provided the GSEs as part of the 2008 bailout. This has left taxpayers exposed to funding another bailout and hampered chances for reform of the GSEs.

The New York Times has explored this unconventional situation at length and worked hard to get to the bottom of the government’s motives and secrecy in pending court cases. Fortune has also laid out the unsettling facts in a recent feature.  Certainly, the government’s deviation from the rule of law and possible illegal takings of shareholder money merited more than an eye-roll from the Post.

Third, the Post contends advocates of recap and release want a return to “essentially the same cockeyed enterprise structure — privatized profits, socialized risks — that helped set Fannie and Freddie on the road to disaster in the first place.”

The Washington Post needs to cite the investors who have said the country should get back to the old system, part and parcel. The court documents in the litigation focus on allegations of misapplication of the law, not the structure of housing policy.  Similarly, affordable housing advocates and the nation’s largest civil rights organization who recently wrote to Congressional leaders pleading with them to reject the Jumpstart GSE Reform bill, backed by Sen. Bob Corker, R-TN and Sen. Mark Warner, D-VA, acknowledged that changes are needed and urged it be undertaken in a “deliberative transparent process.” 

In addition, the landmark Financial Crisis Inquiry Report concluded that the GSEs reflected dysfunction in the system rather than being a chief cause of the problem.  The Post would do better to show how dismantling Fannie Mae and Freddie Mac altogether would make the system better or explain what the alternative would look like.

Reform of federal housing policies has been the responsibility of Congress and the Administration for seven years but nothing has happened.  Legislation has never gained enough support on both sides of the aisle in both chambers – even with a push by mortgage bankers, big banks, realtors and other vested interests.  Instead of urging a pause and hearings on the complex issues of where capital where would come from, the nature of the government backstop and the implications for average Americans who want to buy a home, the Post cheered the inclusion of Jumpstart GSE reform in the omnibus spending bill – a $1.1 trillion bag of goodies lawmakers blessed but barely read as they hurried home for the holidays.

That gets to a fourth issue; the Post’s characterization of the Jumpstart Reform language as a major victory for taxpayers. The editorial noted it would prohibit the Treasury from divesting its stake in Fannie and Freddie for two years, meaning, “…lawmakers have managed to freeze the status quo until the next Congress, and a new president, take office.” That is not a jumpstart for reform. It is chain to ensure nothing happens.

The Mortgage Bankers Association also lauded the vote. The Post should report in depth on why.  Editors and Members of Congress should seek answers to subsequent questions such as: What will a two-year delay mean for the mortgage finance market and taxpayers?  Why is that good?  How would Too Big to Fail Banks fair once the GSEs are dismantled? 

“Politics makes strange bedfellows; when you mix politics with money, it makes for unholy alliances,” read the opening line of the Post’s editorial. The New York Times took note of this recently in a story on the revolving door at Treasury and major trade associations. The Post, however, is content to move on with barely a harrumph rather than ask if there was something unholy in these alliances.

“The question, then, is not whether to maintain the status quo, which is neither acceptable nor sustainable. The question is whether to work with Congress to develop a housing finance system that protects taxpayers and provides broad access to mortgage loans over the long term, as the current system cannot,” declared the Post in an editorial on April 25, 2014

That made sense then and still does. Impugning the motives of a diverse group of investors and housing advocates who want the law followed immediately and celebrating an eleventh-hour move to put the brakes on reform makes no sense.

The fact that two of nation’s top newspapers offered such misleading analyses reveals the need for clarity and facts in the discussion of how to end the flawed and illegal conservatorship. 

As 2016 opens, Congress should commit itself to getting a handle on what has gone wrong with the conservatorship of Fannie Mae and Freddie Mac. Assuming the Obama Administration will remain hunkered down in its policy of bleeding the GSEs, Congress can at least set the stage for resolving the fate of the mortgage finance giants in a way that comports with the law and serves taxpayers and investors, starting with oversight hearings.