Fannie Mae and Freddie Mac are the quintessential federal government boondoggles. Created in 1938 by FDR, the two institutions’ function is to buy mortgages and provide guarantees for the same in order to make homeownership more likely for more Americans. Like many government programs, Fannie and Freddie’s objective is noble, but at the same time inappropriate for government to undertake. The current subprime crisis accentuates this statement and provides an excellent opportunity for Uncle Sam to get out of the mortgage business, since there are substantial reasons for its withdrawal.
In the first place, and this should come as no surprise since Washington has meddled in areas prohibited to it by the Constitution for a long time, Fannie Mae and Freddie Mac are unconstitutional. The words bank, lending, mortgage, or anything related cannot be found in the Constitution. James Madison, the Father of the Constitution, fought bitterly on constitutional grounds against incorporation by the Congress of a national bank. If the Father of our Constitution knew a national bank was unconstitutional, then logically, mortgage services would also be proscribed by the document.
Another important reason for Uncle Sam’s withdrawal from the mortgage business has to do with conflicts of interest. Even though Fannie and Freddie were originally set up as government sponsored enterprises (GSE), Presidents Johnson and Nixon made them publicly traded companies with authority to sell shares of stock. The problem is that as a GSE, the shareholders of Fannie and Freddie enjoy several big advantages over their competitors: a guaranteed line of credit with the US Treasury, cheaper borrowing costs, lower capital requirements, and an implicit federal guarantee against failure.
Additionally, Fannie and Freddie have, for some time now, used taxpayer money to lobby for perks and privileges not afforded to their private sector competitors, such as exemptions from paying local and state taxes. If that is not bad enough, Fannie and Freddie lobbyists have infiltrated this year’s presidential campaign. Twenty or more of John McCain’s fundraisers have lobbied on behalf of Fannie and Freddie. His campaign manager, Rick Davis, served as president of an advocacy group led by Fannie and Freddie that lobbied for the duo against regulation. Perhaps these contacts explain McCain’s recent remarks and his zeal for using taxpayer money, no matter what the cost, to keep Fannie and Freddie from failure.
“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail … we will do what's necessary to make sure that they continue that function.”
John McCain, July 2008
Article comments
1 - bliffle
Yes, there are severe flaws in FNMA, etc., that can be traced out in their history (though one might justifiably take exception to your blanket condemnation on Strict Madisonian grounds, as so many have in the last 200 years), but that's not going to help the immediate problems or provide a cue for future improvements in methods.
It's just not reasonable or even possible to eliminate joint public/private projects entirely.
In the USA the principle of public/private joint ventures has a pretty successful history and accounts for a large part of our development and wealth, such as railroads, canals, airlines, cities, etc. Both the public and private companies have initiated and supported such joint ventures with enthusiasm which has been reinforced by successes and plagued by failures, just like most human enterprises.
What we need in the future is proper administration, management and regulation. The stakeholders have to have visibility into operations and a say over policy. And we have to institute and maintain some guidelines and rules-of-thumb.
Most importantly, people have to go to jail for illegal activities associated with these projects. And to do that we must rectify our own views of justice. Right now there are two execs of Bear Stearns, who are indicted, whose defense is that it was perfectly OK for them to panic sell their own stock while they continued to tell clients to buy.
2 - bliffle
Besides, who the heck could afford to buy either of them?
This reflects the error of allowing any organization to become huge and unmanageable. We should cut them down to size long before that can happen. They should be broken up into more manageable pieces.
3 - Cannonshop
"...Most importantly, people have to go to jail for illegal activities associated with these projects. And to do that we must rectify our own views of justice. Right now there are two execs of Bear Stearns, who are indicted, whose defense is that it was perfectly OK for them to panic sell their own stock while they continued to tell clients to buy."
Wow, blittle, you said something I AGREE WITH...at least "Mostly" agree with. Most americans of any political stripe would agree, I think, that these and other fraudsters should be facing (to borrow a term from the movie "office space") "Federal F--- you up the Ass prison"-a chance to share cell-space with Crips, Bloods, skinheads, and other violent subhuman scum, just like ordinary fraudsters that AREN'T multimillionaire brokers.
As for the actual article- FNMA and Freddymac were originally temporary-much like most of the depression-era alphabet agencies, they were intended to be a short-term fix, not a long-term institution, it's that whole 'continuing on beyond the point of being a useful tool' thing that has created this mess, and like a LOT of what eats our taxes to fill the bellies of the nonproductives in D.C., it should have ended decades ago-long before the agencies got so big they were no longer manageable.
4 - baritone
Doing any major tampering with Freddie and Fannie is a delicate if not dangerous undertaking. The two institutions have become monsters, but so much of the mortgage lending industry is intertwined with them that any wholesale changes could have a disastrous effect.
If either were allowed to fail, the residential mortgage business would come to a screeching halt. Fannie and Freddie hold the paper on a huge amount of mortgage debt. As noted around half of all residential mortgage debt is held by F&F They buy and sell multi-million dollar packages of mortgage loans everyday. Virtually anyone here who owns one or more homes secured by a mortgage have been or remain under some level of control of Fannie or Freddie. The failure of either or both would result in chaos in the industry that would surely have serious adverse effects on homeowners.
Fannie and Freddie have had the effect of creating and enforcing lending standards which are used throughout the industry. As a residential appraiser I am obliged to follow strict guidelines in the process which extend further the rules set by the Uniform Standards of Appraisal Practice(USPAP.)
Whether one likes government involvement in such matters (and, clearly, most who post here don't) should the government abandon Fannie and Freddie, we could be in for a world of shit.
And remember, although HUD and the VA represent a somewhat different kettle of fish, FHA and VA loans sponsored by the government have made it possible for a large number of people to purchase homes who otherwise could not.
B-tone
5 - Ruvy
I understand Baritone's point of view, having once been a homeowner myself in the States. So, let's examine how a system might run without Freddie and Fannie around.
You poor suckers! Guess what country I'm talking about. Israel!!
In Israel, in addition to having to put down at least 10% of the purchase price of the house/apartment, you have to buy a life insurance policy, that you pay for that names the mortgage bank as beneficiary. I'm not going to mention all the fees and taxes and byzantine negotiating that goes on because that is a product of the culture here, and would not be relevant to American mortgage baning with a sold out Freddie and Fannie watching only their own swollen butts.
But in essence, the mortgage banks would have no place to dump the mortgage. So they are going to come after you like junkyard dogs if you don't cough up your monthly fees.
Doncha just love capitalism, folks?