For Immediate Release
We are a group of concerned taxpayers, students, families, shareholders and citizens who are dedicated to establishing fairness in America’s housing market. The combination of congressional and US Treasury pandering is poised to undermine homeownership, rip-off taxpayers, and gift billions of dollars to financial institutions. At stake is not only the future of mortgage giants Fannie Mae and Freddie Mac, but the real interests of American taxpayers, homeowners and stakeholders.
For the past five years, the US Treasury has imposed uniquely onerous terms on Fannie Mae and Freddie Mac in an effort to hollow them out. Now, the Senate Bill 563 calls for Fannie and Freddie's demise; only to replace them with an ill defined, untested insurance scheme, which places the large banks in control – leaving homeowners at risk and taxpayers on the hook for future catastrophic losses.
Before the advent of Fannie Mae in 1937, home loans were harder to get and more vulnerable to busts. Fannie Mae, and later Freddie Mac, made the home loan market more resilient by pooling risk and attracting a wide range of investors. They provided what banks could not: continuous access to affordable, 30 year fixed rate loans with no prepayment penalty. For almost five decades, they helped establish a culture of middle-class home ownership, which is regarded as a bedrock of American values. In other words, in the absence of Fannie Mae and Freddie Mac, the mortgage market would invariably be smaller, less liquid, and more volatile. (see this video for general stats, and this video for multifamily stats)
Those who seek to end Fannie and Freddie insist that the GSEs were the primary villains of the financial crisis. They argue that the government’s catastrophic guarantee is misplaced, and that our housing market would be much safer if placed solely in the hands of the big banks. Each of these contentions is mendacious.
Fannie and Freddie are commonly portrayed as the villains that perpetrated the 2008 financial crisis, when in reality they were the playing field. With the big banks in the skill positions, mortgage lenders on the line and politicians coaching from the sidelines, the real villains were the absence of credible rules and umpires to enforce them. The big banks and mortgage lenders didn’t have any skin in the game nor were they called out for illegal motion; they simply passed the sub-standard loans down the field. Eventually, these bad loans piled up as widespread defaults and catastrophic losses for Freddie and Fannie. Rather than blame each other for devastating record of losses, the key players and coaches direct their fingers down at the playing field demanding a new venue.
As structural support to our $15 trillion home loan market, a taxpayer backstop has proven to be critical. Absent this taxpayer promise, to step in during times of extreme crisis, untold trillions of dollars would never come to the housing market, mortgage rates would be far higher, our economy crippled and housing prices far lower.
The Senate Bill 563 proposes that we transfer the taxpayer backstop from Fannie and Freddie to the big banks. Once the plug is pulled on Fannie and Freddie, the valuable American mortgage market will be the private property of a few influential banks. The next time we have a housing crisis, the taxpayers will have no choice but to directly bail these big banks out. Under the Senate Bill 563, the big banks will do very well, even if homeowners and taxpayers don’t.
Big banks are not particularly well suited to protect the interest of taxpayers or homeowners. That is not their business. It is to maximize opportunities and to score profits. Those who contend that the big banks will suddenly become good stewards of our housing market ignore the fact that they have already settled billions in claims for defrauding Fannie and Freddie. Before handing over the nation’s house keys to the big banks, a brief review of the London Whale losses, the interest rate swap scandals and LIBOR manipulation scandal should give everyone pause.
By placing Fannie and Freddie into Conservatorship, the US Treasury has largely done the big bank’s bidding. Fannie and Freddie were charged double the rate big banks paid for borrowing taxpayer funds. When the big banks could not unload their toxic loans quickly enough, the Treasury prodded Fannie and Freddie to purchase these junk assets. Under the creative fallacy that real estate prices were never going to recover, the US Treasury forced a write down of Fannie and Freddie assets, doubling their total taxpayer debt to $188 Billion. As the financial tsunami retreated, the big banks were encouraged to pay back their debts to the taxpayers, hire lobbyists, support political candidates, and generally get on with business.
Not so Fannie Mae and Freddie Mac. These two entities are expressly prohibited by a US Treasury decree from repaying any of their debts or participating in any form of political lobbying or fundraising. The US Treasury has already collected $146 Billion from Fannie and Freddie and, by the first quarter of 2014, if not earlier, Fannie and Freddie are poised to return every penny they ever borrowed from fellow taxpayers. Yet, they remain uniquely trapped in the US Treasury's debtor's prison.
Profitable companies, such as Fannie and Freddie, are not typically hollowed out. Thanks to a revival of real estate prices and improved underwriting fees, Fannie and Freddie’s net income is expected to reach a whopping $110B this year, a record, which to put in perspective, is greater than the expected combined earnings of both Exxon and Apple. Yet, nothing will go to Fannie and Freddie shareholders, or build up Fannie and Freddie's capital base. Instead, based on the clandestine, August 2012, Treasury decree, all earnings are now funneled directly to Treasury’s general fund.
In stripping all cash out of Fannie and Freddie, taxpayers are being ripped off. When Fannie and Freddie were placed into conservatorship, the US treasury granted itself warrants for 79.9% of both Fannie and Freddie's common shares. These warrants represent payment to the taxpayer for backstopping Fannie and Freddie. Assuming that Fannie and Freddie are restored, rebuilt and return to their 2007 market valuation of $150 Billion, taxpayers would have a $120 Billion asset. Yet, thanks to the Treasury and the Senate Bill 563, US taxpayers lose all this value. The big banks get Fannie and Freddie’s franchise and invaluable government backstop, compliments of the American homeowners and taxpayers, absolutely free.
Should the big banks want a piece of a reformed and rebuilt Fannie and Freddie, let them buy it from the taxpayers at a fair market price, not be gifted to them on the cheap through Congressional lobbying and influence peddling at the US Treasury.
Rather than destroying Fannie Mae and Freddie Mac for the selfish interests of the few, they should be restored for the broad benefit of the great many. There are already a number of solid strategies developed by the GSEs. Other steps to achieving such basic fairness are straightforward. Designate all past and future payments from Fannie and Freddie to the US Treasury as repayment of debt to the American taxpayers; rebuild Fannie and Freddie's capital base by releasing them from conservatorship to allow them to accumulate private capital, enshrine responsible lending standards in their charters, and build value in Fannie Mae and Freddie Mac for American taxpayers, homeowners and stakeholders.