The Government Doesn’t “Own” Fannie & Freddie
- April 7, 2015
To the uninitiated, a recent NPR story might have seemed like a primer on how Fannie and Freddie work and a straightforward attempt to explain the facts under the headline, “As Economy Rebounds, Government Still Plays Role In Mortgage Business.” But many listeners and Investors Unite members have not been shy about hammering away at what the story didn’t say.
To be sure, the piece had some good points. We were encouraged to hear the reporter accurately state that Fannie Mae and Freddie have repaid the taxpayer loans they received as a bailout from the 2008 financial crisis. The comment is also in the appropriate context that the government is reaping a windfall from sweeping up all of the companies’ profits:
“There is an upside to controlling Fannie and Freddie at least for now. They’ve paid back the $187 billion bailout and the government gets to keep their profits now – an additional $40 billion so far.”
On the other hand, in the discussion about how to move forward on the fates of Fannie Mae and Freddie Mac, the piece touched only lightly on the conservatorship and implications for policy options. The story quoted the publisher of Inside Mortgage Finance, Guy Cecala, claiming that there are just two options for the future of Fannie Mae and Freddie Mac: the government retains ownership or they go completely private. And if they transition to solely private-run, there consequences would be grave indeed:
“Cecala says one reason the government has been reluctant to hand Fannie and Freddie over to the private sector is that a privately-run Fannie and Freddie might only be interested in guaranteeing certain loans, like loans to really rich people or people with practically perfect credit.”
Well, that is one perspective but not one that reflects the perspective of our members and policy experts we have showcased. The fact is, for decades the GSEs operated as a quasi-government entity – functioning like a private company but backed by a government guarantee in case of market-wide disruptions that would threaten their viability. Both Fannie and Freddie have guaranteed mortgages for every kind of homeowner that exists in the country.
In a comment posted at NPR, one listener took issue with the notion that to honor the terms of the conservatorship would obstruct access to mortgages for average people:
“Third, Ms. Smith says that if the government releases Fannie and Freddie back to their stockholders, they “might” only guarantee loans to wealthy people. Not only is this a totally groundless assumption, it is journalistic fraud to even imply it. Fannie and Freddie have decades of history of guaranteeing loans. There is nothing whatsoever in their history that would lead to the assumption that only the wealthy would be served.”
More importantly, it would have been useful to explain why the government won’t release its chokehold on Fannie and Freddie. The why, as we all know very well, has everything to do with the $40 billion (and growing) that the U.S. Treasury has swept up from the companies in the illegal Third Amendment Sweep.
Furthermore, it is inaccurate to say that the government “owns” the companies. Through the Preferred Stock Purchase Agreement that was drafted as a condition of the bailout in 2008, the federal government took over 79 percent of senior stock in both Fannie and Freddie. That percentage was set precisely to avoid a government takeover. The establishment of a conservatorship under the Housing and Economic Recovery Act was a conscious decision by Congress and the Administration to return the GSEs to private control once they were “sound and solvent.”
It would be more accurate to say that the government nationalized the entities when Treasury decided to pre-empt the law that established a temporary conservatorship and instead set up an illegal sweep of profits that prevented the creation of a capital buffer. The government had already set aggressive terms when it bailed out Fannie and Freddie, giving itself plenty of upside in event of their return to profitability. Besides the money that has been paid back so far, the government would stand to make almost two hundred billion dollars from the sale of its position in the common stock if it were to end the conservatorship, according to some estimates. We think that’s appropriate: The taxpayers should profit for the bailout that these companies were given in 2008. But to change the terms of the deal to take 100% of all profits is both illegal and sets a horrible precedent, as former FDIC Chair Bill Isaac recently pointed out.
One listener posted a comment on NPR, offering this stark analogy:
“Instead of requiring a 10% dividend, which was the original agreement, they decided to take ALL of the money! This is no different than loaning a friend $100 and after they pay you back to demand that they keep paying you another $100 every quarter until they say you can stop paying! Al Capone used this tactic when his hustlers did not come through with their debts on time. This is the metaphor for what the gov’t has done to shareholders of these “public” equities.”
Great to see this attentiveness and spirited engagement as major media turn their attention to the fate of Fannie and Freddie and what is at stake for taxpayers and investors.