WHO says Democrats and Republicans can’t agree on anything? When it comes to fixing the government’s troubled and costly relationship with the private mortgage market, bipartisanship is very much alive. Politicians in both parties have reached consensus over the past four years to simply do nothing.
Consider the elephant in the room: Fannie Mae and Freddie Mac owe American taxpayers nearly $140 billion — and there seems to be no plan on any front to pay it back.
Though many Americans aren’t aware of it, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are publicly traded companies — like I.B.M. or General Electric. Except these two giant housing lenders were created by Congress and, as a result, have a relationship, albeit an awkward one, with Uncle Sam. As so-called government-sponsored enterprises, or G.S.E.’s, they have long played an important role in the development of the nation, helping to channel credit to millions of Americans who might otherwise not be able to get home mortgages.
The trouble now is that the debt owed by Fannie and Freddie, both of which have been in government conservatorship since 2008, is being ignored.
That year, in the midst of the housing crisis and the Great Recession, Washington agreed to spend $600 billion in public money to rescue major American banks, insurers, automakers and, yes, the G.S.E.’s — fearing an even deeper and longer recession if these companies failed. Since then, most of these bailed-out firms have paid taxpayers back.
Not Fannie or Freddie.
Even more remarkable than their $140 billion public debt (the money lent to the agencies minus dividends paid) — equivalent to the stock market capitalizations of the Starbucks Corporation, the Kellogg Company and the McDonald’s Corporation combined — is that there seems to be no active plan to make taxpayers whole again. This, in short, has become the forgotten bailout.
As President Obama and leaders in Congress thrust and parry over the imminent “fiscal cliff,” it seems just plain nuts to ignore an I.O.U. that immense. Throw in the recently announced shortfall in reserves at the Federal Housing Administration, the government-run mortgage-insurance program, and the national mortgage mess gets even uglier.
The government has tried to recover some of what Fannie and Freddie owe — but until recently this was limited to interest on the government loan, not the principle.
Last summer, the United States Treasury decided that, rather than require the G.S.E.’s to pay interest on their debt to taxpayers, it would require any profits generated by Fannie and Freddie to be swept into the Treasury’s coffers. Unfortunately, this has created problems of its own because it has led to the commingling of the still legally private G.S.E. funds with those of the federal government — and it complicates the ultimate recapture of Fannie’s and Freddie’s value. Moreover, as the International Monetary Fund recently warned, the practice adds major risk to the United States balance sheet.
A better approach is possible — but to devise the right plan, lawmakers will have to start giving the issue the attention it deserves.
In the early part of the 1990s, as Fannie and Freddie were reporting record profits, legislators ignored those who warned that Fannie and Freddie were leading the rush toward the coming calamity in housing.
Then, in mid-decade, the Clinton administration embarked on a plan to expand homeownership rates by easing lending standards; the effort encouraged borrowers to keep less equity in their homes and to buy bigger properties than they could afford. But policy makers played down the risks under the belief that “more lending” was always better.
In the early 2000s, a few legislators did seek changes that would have tamed the aggressive lending practices of these two behemoth agencies. But these were stymied by the Bush administration.
When, later in the decade, Fannie and Freddie bought billions of dollars in subprime loans, some respected financial analysts warned of the risks they posed. Washington paid little heed. Representative Barney Frank, then chairman of the House Financial Services Committee, said Freddie and Fannie weren’t the problem. They were “the good part” of the home-financing system. Mr. Frank was hardly alone in such thinking: this was the default view in the nation’s capital.
By 2007, the housing crisis was fully upon us. Still, the Bush administration, the Federal Reserve and Congress would wait another year before acknowledging that the crisis was indeed more profound than a short-term lack of confidence in the market. Rather than force Fannie and Freddie to raise their capital reserves to the levels needed, though, Washington continued to bury its head.
Today, five years after the housing crisis began and well over a decade since lawmakers were made aware of the economic turmoil a failing Fannie and Freddie could wreak, it’s time for the public to demand some answers.
Maybe we won’t get all of them. But we can start, at least, by posing two simple questions to every lawmaker within earshot: What are the plans to recover the $140 billion the American taxpayer is owed — and when will we be paid back?
Joshua Rosner, a financial services analyst, is a co-author, with Gretchen Morgenson, of “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time.”