What About Fan and
Fred Reform?
Congress remains missing in action on two key
causes of the financial crisis.
By ROBERT
G. WILMERS
Congress may be making progress
crafting new regulations for the financial-services industry, but it has
yet to begin reforming two institutions that played a key role in the
2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we
fully confront the extent to which their outrageous behavior and
reckless business practices have affected the entire commercial banking
sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly
on their balance sheets or as guarantees on mortgage securities they'd
sold to investors—was $8.1 trillion. That compares to $7.8 trillion in
total marketable debt outstanding for the entire U.S. government. The
debt has the implicit guarantee of the federal government but is not
reflected on the national balance sheet.
The public has focused more on
taxpayer bailouts of banks, auto makers and insurance companies. But the
scale of the rescue required in September 2008 when Fannie and Freddie
were forced into conservatorship—their version of bankruptcy—was
staggering. To date, the federal government has been forced to pump $126
billion into Fannie and Freddie. That's far more than AIG, which
absorbed $70 billion of government largess, and General Motors and
Chrysler, which shared $77 billion. Banks received $205 billion, of
which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end
in sight. The Congressional Budget Office estimated that if their
operating costs and subsidies were included in our accounting of the
overall federal deficit—as properly they should be—the 2009 deficit
would be greater by $291 billion.
Worst of all are the tracts of foreclosed homes left behind by
households lured into inappropriate mortgages by the lax credit
standards made possible by Fannie Mae and Freddie Mac and their promise
to purchase and securitize millions of subprime mortgages.
All this happened in the name of the "American Dream" of home
ownership. But there's no evidence Fannie and Freddie helped much, if at
all, to make this dream come true. Despite all their initiatives since
the early 1970s, shortly after they were incorporated as private
corporations protected by government charters, the percentage of
American households owning homes has increased by merely four percentage
points to 67%.
In contrast, between 1991 and 2008, home ownership in Italy and the
Netherlands increased by 12 percentage points. It increased by nine
points in Portugal and Greece. At least 14 other developed countries
have home ownership rates higher than in the U.S. They include Hungary,
Iceland, Ireland, Poland and Spain.
Canada doesn't have the equivalent of Fannie and Freddie. Nor does it
permit the deduction of mortgage interest from an individual's taxes.
Nevertheless, its home ownership rate is 68%. Canadian banks have
weathered the financial crisis particularly well and required no
government bailouts.
This mediocre U.S. home ownership record developed despite the fact
that Fannie and Freddie were allowed to operate as a tax-advantaged
duopoly, supposedly to allow them to lower the cost of mortgage finance.
But a great deal of their taxpayer subsidy did not actually help make
housing less expensive for home buyers.
According to a 2004 Congressional Budget Office study, the two GSEs
enjoyed $23 billion in subsidies in 2003—primarily in the form of lower
borrowing costs and exemption from state and local taxation. But they
passed on only $13 billion to home buyers. Nevertheless, one former
Fannie Mae CEO, Franklin Raines, received $91 million in compensation
from 1998 through 2003. In 2006, the top five Fannie Mae executives
shared $34 million in compensation, while their counterparts at Freddie
Mac shared $35 million. In 2009, even after the financial crash and as
these two GSEs fell deeper into the red, the top five executives at
Fannie Mae received $19 million in compensation and the CEO earned $6
million.
This is not private enterprise—it's crony capitalism, in which public
subsidies are turned into private riches. From 2001 through 2006,
Fannie and Freddie spent $123 million to lobby Congress—the
second-highest lobbying total (after the U.S. Chamber of Commerce) in
the country. That lobbying was complemented by sizable direct political
contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage
market has come to be structured around Fannie and Freddie and powerful
interests are allied with the status quo. I recall a personal
conversation with a member of Congress who, despite saying he understood
my concerns about the two GSEs, admitted he would never push for
significant change because "they've done so much for me, my colleagues
and my staff."
Nonetheless, Congress must get to work on the reform of Fannie Mae
and Freddie Mac. A healthy housing market, a healthy financial system
and even the bond rating of the federal government depend on it.
Mr. Wilmers is chairman and CEO of M&T Bank Corporation, an
independent commercial bank holding company. This op-ed was adapted from
his speech at the company's annual shareholders meeting last month.
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