Unlimited Backing for Fannie, Freddie Draws Fire

Published January 13, 2010

Annual reports for Fannie Mae and Freddie Mac used to declare, “Neither company has received any taxpayer dollars. In addition, no taxpayer funds are needed for their safety and soundness.” Now, however, the federal government has pledged unlimited taxpayer backing for the failing mortgage giants—and economists and Washington politicians are criticizing the move.

The announcement came after major financial markets had closed on Christmas Eve, when most news organizations would be running a skeleton crew. It also came just days before Treasury Department officials would have had to go to Congress for permission to ignore a $400 billion limit of support the lawmakers had imposed.

“Giving unlimited funding to Fannie and Freddie is like giving liquor and car keys to two irresponsible teenagers,” said Mark Thornton, an economist at the Mises Institute in Auburn, Alabama. “It puts the taxpayers at great risk and only worsens the financial outlook for the nation and economy.

‘Running Out of Bullets’
“Long-term interest rates are inching up, and the outlook for foreclosures in 2010 is very bad, while our government is backing nearly 90 percent of new home mortgages. The government is running out of bullets in its war to restore ‘confidence,'” he said.
Fannie Mae and Freddie Mac purchase home loans from lenders and sell them to investors. Together they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages in the nation.

The companies were created by the federal government decades ago to expand home ownership but were ostensibly private operations called government-sponsored entities.

Critics long said these GSEs had implicit government backing. The backing became explicit in September 2008 when then-Treasury Secretary Henry Paulson announced the creation of a new body—the Federal Housing Financing Agency—would put Fannie and Freddie under government conservatorship. This action followed staggering financial losses and the collapse of the housing market.

More Than $110B Spent
To date taxpayers have spent more than $110 billion to prop up Fannie and Freddie.

“More than a year after the financial meltdown caused by the Fed’s easy-money policies and years of subsidies to home owners, federal policymakers appear to have learned nothing from their mistakes,” said Chris Edwards, director of tax policy at the Cato Institute. “Fannie Mae and Freddie Mac’s cheap mortgage policies were central to the housing boom and bust, so to prevent a repeat disaster we should withdraw subsidies from housing markets and allow them to find a sustainable equilibrium.

“Fannie and Freddie ought to be fully privatized and completely cut off from Washington’s money spigot,” Edwards added.

Members of Congress from both sides of the political aisle have expressed varying degrees of consternation over the Treasury Department’s surprise move.

House Energy and Commerce Committee Chairman Henry Waxman (D-CA), criticized what he described as the “blank check” for Fannie and Freddie.

Fellow California Congressman Darrell Issa, a Republican, told reporters the move is “a continuation of the bailout policies that have mortgaged away the future solvency of our country.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.