When the nation’s housing crisis grew into an economic disaster, many Republicans in Washington pointed to two culprits: Fannie Mae and Freddie Mac.
The housing giants — Freddie Mac is officially called the Federal Home Loan Mortgage Corporation and Fannie Mae is the Federal National Mortgage Association — are government sponsored enterprises, funded by taxpayers but run as private companies. The federal government created them to buy up mortgages, bundle them and sell them as mortgage-backed securities on the open market, thus increasing the money available for home loans.
As we noted in our first update, Fannie and Freddie were powerful organizations and the nation’s largest mortgage buyers during the housing boom. They backed shoddy loans, leaving taxpayers on the hook when the market crashed.
The portfolio of the two firms is worth roughly $1.5 trillion, the New York Times reported in early 2012. When Republicans campaigned to take over the House in 2010, they pledged to reduce that by many zeros, as well as establish new capital standards and shrink the government’s role in the mortgage industry.
But nearly two years into the 112th Congress, none of that has been done. Bills have been introduced, but none has made it to a floor vote.
“That no bill has come to the House floor, no real reform bill, is a disappointment and shows how they’ve backtracked from much of the pledge,” said John Berlau, senior fellow at the Competitive Enterprise Institute, a think tank that advocates for minimal government involvement in markets.
In addition to the bills mentioned in our first update, several more were introduced that would begin to downsize Fannie and Freddie.
H.R. 1227, the GSE Risk and Activities Limitation Act prohibits the GSEs from offering, undertaking, transacting, conducting or engaging in any new business activities while in conservatorship or receivership. The restriction is sought to reduce Fannie Mae’s and Freddie Mac’s market dominance and limit their size.
H.R. 1225, the GSE Debt Issuance Approval Act requires the Treasury Department to approve any new debt issuance by the GSEs and justify its decision to Congress and the FHFA within seven days.
H.R. 1223, the GSE Credit Risk Equitable Treatment Act clarifies the risk retention rules required under the Dodd-Frank Act to make clear that Fannie Mae and Freddie Mac will be held to the same standards as any other secondary mortgage market participants.
H.R. 1221, the Equity In Government Compensation Act suspends the compensation packages for executives of Fannie Mae and Freddie Mac and places all employees on the Federal pay scale.
All of those bills were introduced in early 2011, passed by a subcommittee and referred for a committee vote. None has seen any action since April 2011.
Several more bills, aimed at ensuring repayment to taxpayers, requiring greater transparency and setting new caps on bailouts, are languishing too.
H.R. 1182, the GSE Bailout Elimination and Taxpayer Protection Act, is perhaps the most comprehensive approach to winding down the operations of Fannie Mae and Freddie Mac. It sets a deadline for ending the conservatorship and puts strict new rules in place over future operations of the two GSEs. Despite drawing 79 co-sponsors, it also hasn’t been touched since April 2011.
We talked to two experts who say the inaction is not just a matter of Democrats stymying the bills.
“There are some Republicans that are very much attuned to the housing lobby, and the housing lobby of course likes government guarantees and they pretty much like Fannie and Freddie as they are,” said Ed Pinto, a fellow at the conservative American Enterprise Institute and former vice president of Fannie Mae. “There’s not unanimity.”
Said Berlau: “There are many reformers within the Republican party who are serious about phasing Fannie and Freddie out,” singling out Rep. Scott Garrett of New Jersey, who backed many of the reform bills. “There are also too many defenders of the status quo within the party.”
Pinto attributes it to what he calls the “government mortgage complex.”
“You’ve got the housing lobby who likes to have lending to as many people as possible … (and) historically has been very supportive of anything to expand the footprint of lending, and the path of least resistance to that,” he said.
“Second you have Wall Street which loves to trade things,” he said, noting that 200 billion Fannie Mae securities trade every day and “Wall Street makes money on each buy and sell.”
The third piece are community groups that push for affordable housing and looser lending to enable more people to buy homes.
“Their efforts dovetail with the housing lobby,” Pinto said. “It’s hard to oppose that.”
A small step
Berlau mentioned one change that he said counts as an indirect move toward shrinking the Fannie and Freddie portfolios.
Conforming loan limits, which are the size of mortgages Fannie and Freddie can legally back, were raised temporarily from $625,500 to $729,750, with the higher limit set to expire at the end of September 2011.
“The real estate lobby pushed hard, very hard to keep this from expiring, and when it did expire, it pushed hard to get it at this level again,” Berlau said.
The higher level won approval in the Senate, led by Democrats and a handful of Republicans. But the House didn’t vote on it so the loan limit is back down to $625,500.
“Technically, the portfolio shrunk,” Berlau said. “You could make the argument that had the GOP not been in charge of the House, they would have renewed or extended the higher conforming loan limits.”
But there’s a caveat, Berlau said, in that the compromise reached with the Senate was that FHA loan limits would be raised.
“In some ways it’s transferring the risky activities of Fannie and Freddie directly to the government and the Federal Housing Administration,” Berlau said.
“It’s disappointing that they didn’t do more. They didn’t pass a repeal. They blocked new legislation and it was such a struggle to let this expire, I think that offers dim hope for reform,” he added.
Prospects this year
Pinto said that on the legislative side, “there’s been a little bit of ‘you go first,’ since the (Obama) administration was going to take the lead on this. There hasn’t been a real concerted effort to have a meeting of minds and working out something that could pass.”
“At this juncture, we’re looking at the next Congress.”
“I think you could get a majority of Republicans, or even two-thirds of Republicans voting to repeal or phase out Fannie and Freddie, but you have a sizeable minority that wants to maintain the status quo,” Berlau said. “And given the rock-solid Democratic support of Fannie and Freddie, I don’t think this Congress will.”
“They should have at least passed some bills,” Berlau added, noting that the House frequently passes bills — with pride — under the threat of a veto on issues like health care and EPA regulations.
“All it takes is a simple majority to pass the House. The House passes bills all the time to highlight differences with Obama,” he said. “The fact that they haven’t gone any further rests squarely on members of the Republican Party — the failure does.”
The GOP made a big promise when it said it would drastically reduce the size of Fannie and Freddie and tighten the rules on how they operate.
There’s no shortage of bills awaiting action that would accomplish these goals. But with no movement for more than a year — and little hope of any before this Congress adjourns — those bills will likely die on the shelf.
And it’s important to note that Democratic opposition is not the only thing holding them back. Pinto and Berlau both say that plenty of Republican members are beholden to the status quo.
Fannie Mae and Freddie Mac exist today in much the same size and scope as 2010. Without any concrete reforms, we rate this a Promise Broken.
Interview with Ed Pinto, American Enterprise Institute, June 13, 2012
Email & phone interviews with John Berlau, Competitive Enterprise Institute, June 2012
THOMAS, GSE Risk and Activities Limitation Act, GSE Debt Issuance Approval Act, GSE Credit Risk Equitable Treatment Act, Equity In Government Compensation Act, GSE Bailout Elimination and Taxpayer Protection Act, accessed June 27, 2012
FHA Watch, June 2012
A flotilla of bills to rein in Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac: Once powerful, now punching bags.
Properly speaking, Fannie Mae is the Federal National Mortgage Association, while Freddie Mac is the Federal Home Loan Mortgage Corporation. And officially, they’re “government-sponsored enterprises,” which means they’re neither government agencies, nor fully independent private companies.
During the 2010 campaign, House Republicans vowed to take the stuffing out of Fannie and Freddie by “ending their government takeover, shrinking their portfolios, and establishing minimum capital standards.”
They’re making good on their promise through the U.S. House of Representatives’ Committee on Financial Services, which has a subcommittee on Capital Markets and Government Sponsored Enterprises. The subcommittee has worked on 14 separate bills related to Fannie and Freddie, all intended to either limit their power or bring increased transparency to their workings.
Among the highlights:
H.R. 1224, the Portfolio Risk Reduction Act: Sets new limits to reduce the size of Fannie and Freddie’s portfolios over a period of five years.
H.R. 1222, the GSE Subsidy Elimination Act: Requires gradual increases in guarantee fees at Fannie Mae and Freddie Mac over the next two years. It directs the Federal Housing Finance Agency to consider market conditions in raising the fees so that the actions do not disrupt a housing recovery. GSE stands for government sponsored enterprise.
H.R. 1226, the GSE Mission Improvement Act: Repeals Fannie and Freddie’s affordable housing goals. The bill’s supporters said these goals led to risky borrowing that helped fuel the housing bubble.
H.R. 31, the Fannie Mae and Freddie Mac Accountability And Transparency For Taxpayers Act: Increases the authority of Federal Housing Finance Agency’s inspector general and expands reporting requirements to Congress.
H.R. 463, Fannie Mae and Freddie Mac Transparency Act: Makes Fannie and Freddie subject to the Freedom of Information Act (FOIA) to provide public access to their records.
We should note that these bills have not been up for a vote from the full House yet, but they have been through a subcommittee mark-up, a sign of progress.
We’re not sure what the ultimate fate of these bills will be, and to become law they will have to receive Senate approval and the signature of President Barack Obama (or another vote to override a veto).
For now, we rate this promise In the Works.
U.S. House of Representatives’ Committee on Financial Services, Markup of H.R. 463, Fannie Mae and Freddie Mac Transparency Act of 2011; H.R. 2436, the Fannie Mae and Freddie Mac Taxpayer Payback Act of 2011; H.R. 2441, the Housing Trust Fund Elimination Act; H.R. 2440, the Market Transparency and Taxpayer Protection Act; H.R. 2462, Cap the GSE Bailout Act; and H.R. 2439, Eliminate the GSE Charter During Receivership, July 12, 2011
U.S. House of Representatives’ Committee on Financial Services, Markup of H.R. 31 – Fannie Mae and Freddie Mac Accountability and Transparency for Taxpayers Act; H.R. 1221 – Equity in Government Compensation Act of 2011; H.R. 1222 – GSE Subsidy Elimination Act of 2011; H.R. 1223 – GSE Credit Risk Equitable Treatment Act of 2011; H.R. 1224 – Portfolio Risk Reduction Act of 2011; H.R. 1225 – GSE Debt Issuance Approval Act of 2011; H.R. 1226 – GSE Mission Improvement Act of 2011; H.R. 1227 – GSE Risk and Activities Limitation Act of 2011, April 5, 2011
THOMAS, the Portfolio Risk Reduction Act, the GSE Subsidy Elimination Act, the GSE Mission Improvement Act, the Fannie Mae and Freddie Mac Accountability And Transparency For Taxpayers Act, Fannie Mae and Freddie Mac Transparency Act, accessed Aug. 25, 2011
The New York Times, In Congress, Bills to Speed Unwinding of 2 Giants, March 29, 2011