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| Fannie and Freddie’s Number Up atLast? |
| 2004-01-08 |
| During the Great Depression, Congress created an institution to supply banks with money they could lend for home mortgages. By purchasing banks’ home loans with cash, the Federal National Mortgage Association encouraged banks to make new loans, propping up communities across the country. Congress spun off the institution as a private company in 1968, and it now goes by its catchy acronym: Fannie Mae. Together with its younger sibling, Freddie Mac, it has helped hold interest rates down and made homeownership possible for millions. Today, however, Fannie and Freddie benefit from their government connection far more than homeowners do. A December report from the Federal Reserve Board says the two firms provide meager help to home purchasers. Yet they have become hugely profitable from a federal subsidy that the Congressional Budget Office values at more than $10 billion a year. That’s equal to the State Department’s annual budget. The report shows the importance of a congressional debate over ending the taxpayer subsidies that have helped enrich Fannie and Freddie executives and shareholders. But the companies have enlisted powerful lobbies to squelch that discussion. Instead, Congress is weighing tighter regulation of the firms, which are exempt from many rules covering financial institutions. It’s time to undo this unfair subsidy and let the markets take its natural course. As long as Fannie and Freddie protect their unwarranted subsidies, taxpayers will keep contributing to the companies’ hefty bottom lines — and remain on the hook to bail out the two giants should they falter. Neither pays state or local taxes, and each has a $2.25 billionline of credit from Uncle Sam. But their chief benefit is the belief that the government will rush to their aid if they get in trouble. This implicit guarantee lets them borrow at interest rates nearly half a percentage point lower than other big borrowers can. That is key to their profitability. Yet for all their generosity, taxpayers get: •Small benefits. Fannie and Freddie pass on only a fraction of their savings to home buyers: The average mortgage rate is reduced by less than a tenth of a percentage point, the Fed study estimates. That saves a typical homeowner just $87 a year. By contrast, the two firms had combined profits of $11.8 billion in 2003, according to analysts’ estimates, and paid their executives handsomely. Fannie Mae CEO Franklin Raines made $11.6 million in 2003, and Freddie Mac offered CEO Leland Brendsel $21 million in stock after forcing him out last year. The open market can fix this and in one hell of a hurry. •Big risks. Both companies use complex accounting methods that are hard to understand and easily mask financial problems. These questionable accounting practices pose grave risks for taxpayers, who would be expected to finance a bailout if either firm faced collapse. Together they carry debts totaling $1.5 trillion and have guaranteed another $2 trillion in loans. That nearly equals the debt of the federal government. Great balancing act as long as they stay in balance, but who’s to tell they are in balance? Not these two goofs. Officials at Fannie and Freddie argue that the average homeowner gets about three times as much benefit as the Fed study estimates and that the firms have made it possible for millions of low-income families to own their own homes. Even if the study is stingy with praise, the game is up. It is time to rein these two in, once and for all. But the Fed’s findings confirm previous government studies that show the public gets a bad return on its investment in Fannie and Freddie. Taxpayers deserve an open debate over whether their support is justified. Today’s debate: Home financing Fannie Mae and Freddie Mac benefit more than taxpayers do. These two institutions have done a tremendous job of providing low cost financing to first time/low income home buyers, but the fact is that private lenders can do much, much better, but the way the rules are, that isn’t going to happen. Chucking government subsidies/rules to me seems to be a fair way to make the housing market even better. This is one area that is too important to ignore, and too important to do things the way they have been. |
| Posted by:badanov |
| #3 A2U, YES. Those ads are annoying the SHI* out of me, mainly because I think most people believe them! |
| Posted by: mjh 2004-1-8 2:55:46 PM |
| #2 Anyone else notice that we're now getting ads about how they help the American homeowner? Geez, please, please, let me win a big lotto, I'd love to put counter-ads on. The WSJ has been on them for awhile. But let's face it, Congress won't let it end, too much power. |
| Posted by: Anonymous2U 2004-1-8 1:09:20 PM |
| #1 Peshawar...but I enjoy the article. I think most Americans would be very surprised to see the extent to which the big financial institutions are leveraged, and just how large the value of the derivatives portfolios they use($30 trillion) to hedge their risk. The failure of just one large counterparty (JPM, for instance) could cause a financial meltdown that makes LTCM look like a stroll through the park. No set of companies represents the systemic risk better than FNM and Freddie. |
| Posted by: mjh 2004-1-8 9:44:37 AM |