The depressing reason Obama and Congress have failed to fix Fannie Mae and Freddie Mac

Quartz - December 2, 2015 - December 2, 2015

By Bethany McLean

The Obama administration and a set of constituents who would seem to be its natural allies are currently at war over the festering problem of mortgages. The NAACP and the National Community Reinvestment Coalition (NCRC)—an association of more than 600 community based organizations— are among the groups that have turned on the government. At issue are Fannie Mae and Freddie Mac, the mortgage giants which have been in the clutches of the government ever since the financial crisis of 2008. The groups argue that government sponsored enterprises (GSEs) need reform now, in order to protect access to affordable housing. Surprisingly, they have been given the equivalent of the middle finger by Obama and company. But why?

Let’s back up a few years and set the scene: Fannie and Freddie are essentially giant insurance companies—they stamp mortgages made to American homeowners with a guarantee that they’ll pay the principal and interest if the homeowner can’t. This makes it possible to sell securities backed by homeowners’ monthly mortgage payments to investors. But as we know, in 2008 the inevitable happened. A lot of people were unable to make those payments. Both companies were placed into a state called conservatorship, in which they are run by the government and supported by a line of credit from the US Treasury Department. Then-secretary Henry Paulson called it a “time out.” In other words, it was supposed to be temporary, like putting a screaming toddler in the corner. Instead, it’s been the longest time out in history. Finally, in the summer of 2012, the Obama administration decided to sweep all of the two companies’ profits into the Treasury Department, where they can be used for deficit reduction. In effect the president nationalized the two GSEs.

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