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