Save Housing, Kill Fannie and Freddie

Published November 23, 2011

Four years after its collapse, the housing market continues to crumble. The National Association of Realtors on Nov. 9 reported that housing prices fell in 111 of 150 metropolitan areas in the third quarter of the year. On the same day, Fannie Mae announced it wants an additional $7.6 billion of taxpayer money to cover its most recent losses. Fannie Mae’s losses stem largely from defaulted mortgages in its portfolio.

One day later, Fannie’s evil but smaller twin, Freddie Mac, announced the average interest rate for a 30-year fixed-rate mortgage had fallen to 3.99 percent, only the second time in history rates have gone below 4 percent.

And still housing prices fall.

Fannie is a Depression-era creation, Freddie a Nixon-era invention. The aim of both was to increase housing lending liquidity. As nearly always happens when government injects itself into markets, people in government began expanding the roles, aims and powers of Fannie and Freddie, thus increasing government manipulation of housing markets.

Fannie and Freddie increasingly poured money into the mortgage market, including buying mortgages, pooling them and selling the pooled mortgages as mortgage-backed securities. Since the housing collapse, you’ve probably heard them referred to as “toxic assets.”

Implicit government guarantees have become explicit. Since 2008, taxpayers have seen $169 billion of their money used to prop up Fannie and Freddie, whose meddling in the mortgage market drove interest rates to artificially low levels and weakened loan underwriting standards. The lowered interest rates and weak loan standards enabled buyers to bid up housing prices to artificially high levels until the house of cards collapsed.

As if these damaging manipulations were not bad enough, leaders of Fannie and Freddie have been involved in multibillion-dollar accounting schemes and unrelated political scandals. They cooked the books to “smooth” financial performance. This put millions more dollars into the pockets of Fannie’s and Freddie’s leaders, because their compensation partly depended on financial performance.

In 2007, Freddie Mac paid $50 million to settle federal civil fraud charges. In 2006, Freddie paid a $3.8 million fine for making illegal campaign contributions, mainly to members of Congress who sat on committees that controlled legislation that could have affected the organization.

In 2003, Freddie agreed to pay $125 million in fines for misreporting some $5 billion of earnings.

That was small compared to what Fannie was doing. In 2006, Fannie agreed to pay a $400 million fine and restate more than $10 billion in profits that had been fraudulently reported.

How is any of this different from the worst allegations against the big Wall Street firms?

Congress responded to Wall Street’s abuses with the Dodd-Frank financial regulatory bill, named for its chief sponsors, then-Sen. Christopher J. Dodd, Connecticut Democrat, and Rep. Barney Frank, Massachusetts Democrat. But the bill does not touch Fannie and Freddie. It’s probably no coincidence that Mr. Dodd and Mr. Frank had spent much of their careers protecting the two institutions and manipulating lending to steer money to their pet constituencies.

Fannie and Freddie made possible the large-scale buying and selling of mortgages, the growth of the subprime market, the rapid inflation of housing prices and the collapse that followed, giving us the longest downturn in housing since the Great Depression. Its leaders have been proven corrupt. Its supporters in Congress have used Fannie and Freddie as social-engineering and income-redistribution tools, taxpayers be damned.

Fannie and Freddie should be abolished and replaced with nothing. Buyers, sellers and lenders should be allowed to reach their own deals free from government manipulation and behind-the-scenes maneuvering of corrupt politicians and bureaucrats.

Steve Stanek is a research fellow at the Heartland Institute.