Senate Committee Approves Fannie Mae/Freddie Mac Repeal, But May Repeat Crisis

National Legal and Policy Center

May 20, 2014, by Carl Horowitz

Everyone in Washington favors “reform.” Unfortunately, the term can be highly deceptive. Such is the case of the Housing Finance Reform and Taxpayer Protection Act of 2014 (S.1217), a bill that would abolish troubled mortgage giants Fannie Mae and Freddie Mac in favor of a federally-backed private insurance system. Last Thursday, the Senate Banking Committee approved the measure by a 13-9 vote. Yet the bill, sponsored by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, may never reach the Senate floor – and not undeservedly. For the real problem with Fannie Mae and Freddie Mac, which now are profitable and have more than repaid their federal bailout debt, is not their existence; it is their subjection to tight federal control. The “new” system would retain and even expand this control, while not restoring the rights of shareholders left high and dry.

National Legal and Policy Center several times during the past year (such as here and here) has explained the precarious situation of the Washington, D.C.-based Federal National Mortgage Association (“Fannie Mae”) and the McLean, Va.-based Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the context of a political culture of government bailouts. These congressionally-chartered companies, though shareholder-owned, have operated with a unique public mission: the creation of residential mortgage liquidity. At their rudimentary level, Fannie Mae and Freddie Mac, as “secondary” market mortgage providers, buy existing home loans from primary lenders, such as banks and savings & loan associations, and then either hold these loans as investments or (almost inevitably) package them into pools of marketable bonds known as “mortgage-backed securities.” Fannie Mae and Freddie Mac effectively serve as middlemen, linking housing and capital markets. Ideally, everyone benefits. Banks shed potentially unproductive long-term assets in return for quick cash and thus expand their possibilities for lending; institutional and individual bond investors receive a guaranteed steady yield; and homebuyers realize interest rate reductions of typically anywhere from 20 to 50 basis points (i.e., 0.2 to 0.5 percentage points). But the story hasn’t worked out according to script.

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