Witness the imbroglio of Fannie Mae and Freddie Mac being bailed out.
For years, Washington officialdom enabled Fannie Mae and Freddie Mac, the congressionally chartered mortgage companies, to grow until they dominated the U.S. market. Now lawmakers are confronting the result: a crisis of confidence in the two companies that raises questions about whether they can make it through the deep downturn that has struck the real-estate market. And nobody wants to get stuck with the blame.
Someone has to be responsible. It didn't just happen; the legislation was crafted, considered, and passed. So, who did it?
Lobbyists from the companies are said to have strongly influenced the 1992 legislation, particularly in the House Banking Committee, whose chairman then was Rep. Henry Gonzalez, a Texas Democrat. Critics of the companies say that Rep. Barney Frank (D., Mass.), the current chairman of the committee, also helped put forth the companies' arguments. Mr. Frank now is widely regarded as a strong voice for tougher regulation. "I've been a supporter of their role in housing, but I've been pushing for some time to improve the regulation," he said in a telephone interview on Monday. As for the legislation in the early 1990s, he said he doesn't recall being involved in weakening it.
There it is: I don't recall.
Fannie and Freddie issue debt to the public in order to buy up home mortgages from banks. They hold some of those mortgages as investments and securitize the rest, adding a guarantee of repayment in the event homeowners default. By now, Fannie and Freddie own or guarantee about $5 trillion in mortgages, almost half of the U.S. total.
Last week it was $15 trillion. $5 trillion is too big to disappear.
Congress created Fannie as a government agency during the Great Depression, to encourage banks to lend. Fannie continued to function as a government-run agency during the 1940s and 1950s, even as it took steps toward privatization. In 1968, President Lyndon Johnson decided to turn Fannie into a shareholder-owned company as part of a broader housing bill. Mr. Johnson proclaimed that the new Fannie Mae would "close an important gap in the existing network of financial institutions." In fact, administration officials acknowledged that the move actually was aimed at shifting Fannie's growing operations off the government's books.
Another facet is the history of these GSEs: the first part, of helping to provide liquidity to the loan markets, was good, noble, and it worked. The next part, despite LBJ's rhetoric, of moving them off the government's books is, in the least, questionable. If they got moved off the government's books, where did they wind up?Investors continued to assume that Fannie's debt carried the full faith and credit of the U.S. government, however. Congress did little to dispel that idea, bestowing a range of breaks on the companies, as well as other government ties.
Wink, wink; nod, nod.
The companies' operations suited a lot of other people, too: home builders, real-estate agents, Wall Street investment houses and politicians. And, of course, the companies have helped millions of people buy homes, particularly in times of economic uncertainty.