These are not the best of times for mortgage giants Fannie Mae
and Freddie Mac. Each company recently had to restate billions of
dollars of earnings in the wake of revelations of accounting
irregularities and lavish executive compensation. But a misguided
new proposal in Congress, part of a much larger reform bill, only
would deepen the conditions that contributed toward the companies’
woes in the first place.
The House is on the verge of enacting legislation (H.R. 1461) to
make Federal National Mortgage Association (Fannie Mae) and Federal
Home Loan Mortgage Corporation (Freddie Mac), now with a combined
$1.5 trillion in assets, less vulnerable to a financial meltdown.
These Government-Sponsored Enterprises (GSEs), as they are known,
would have less leeway to expand operations and a new, tougher
regulator in place of the Department of Housing and Urban
Development.
What’s attracting special attention to the measure,
overwhelmingly passed by the House Financial Services Committee in
May, is a proposal that would mix mortgage risk evaluation and
partisan politics in an unprecedented way. Chairman Michael Oxley,
R-Ohio, he of Sarbanes-Oxley Act (2002) fame, is the prime mover
behind a requirement to force the GSEs to devote 5 percent of
after-tax profits to a proposed affordable-housing fund. In 2003
that pool would have been at least $600 million. Eligible
recipients of this largesse include lenders, builders, nonprofit
groups, and government agencies.
It’s understandable why Fannie and Freddie are targets. They’ve
had lots of bad publicity lately. And they’ve got lots of money —
courtesy of federal law. Though shareholder-owned corporations,
each operates under a Congressional charter to promote
homeownership. Their core business is creating mortgage market
liquidity — buying loans from banks, thrifts and mortgage banks
within HUD-approved limits (this year it is $359,650 for a
single-family dwelling), and packaging the loans to Wall Street
investors as “mortgage-backed securities.” In return, their charter
confers upon them special benefits, estimated by the Congressional
Budget Office to have been $10.6 billion a half-decade ago.
Homeowners realized 63 percent of these benefits.
This isn’t quite the win-win situation for the American people
that the GSEs and their political supporters would have us believe.
In fact, there’s an inherent contradiction.
On one hand, Fannie and Freddie must adhere to strict
capitalization standards. On the other, they are under intense
pressure to bend traditional mortgage underwriting standards so as
to make more low- and near-low-income households into first-time
homebuyers. Producing high returns for shareholders while complying
with a wealth redistribution mandate is a balancing act that
virtually invites creative bookkeeping. It may temporarily succeed
during housing booms (like the current one), but the bills
inevitably come due.
Fannie Mae and Freddie Mac are at once heavily subsidized and
heavily regulated. And that makes them vulnerable to shakedowns,
especially by nonprofit community organizations that operate on a
nationwide scale. The Association of Community Organizations for
Reform Now (ACORN), for one, has never shied away from putting the
heat on the GSEs, banks, and thrifts to increase their lending
efforts on behalf of “underserved” populations and geographic
areas. And frequently they use federal grants to politicize the
delivery of housing. The federal AmeriCorps program nearly a decade
ago, for instance, rescinded a roughly $1 million grant to a
subsidiary, ACORN Housing Corp., after it found that the group had
steered low-income homebuyers toward ACORN memberships and imposed
a $60 annual fee as a prerequisite to receive homeownership
counseling.
Latter-day Robin Hoods such as ACORN, the Center for Community
Change, and Neighborhood Assistance Corporation of America aren’t
too troubled by the dubious legality of such practices. When it
comes to disgorging wealth from government agencies and financial
intermediaries, the ends justify the means. In that, they are
similar to the master of the art form, Rev. Jesse Jackson.
Fannie and Freddie’s typical response is acquiescence. From
their standpoint, promoting risky lending and providing grants to
their accusers is a manageable cost of avoiding letter-writing
campaigns, demonstrations and lawsuits. It’s a mistaken strategy.
Paying off their accusers only buys some time before the next
round.
At least several members of Congress grasp what’s at stake. Rep.
Mike Pence, R-Ind., recently circulated a “Dear Colleague” letter
that’s attracted more than 30 signatures. Terming the 5-percent
affordable-housing initiative a “slush fund,” Pence is urging
Congress to delay action on H.R. 1461. He recently won a key
convert in Richard Shelby, R-Ala., who heads the Senate Banking
Committee.
Congress should heed Rep. Pence’s advice. Fannie Mae and Freddie
Mac’s structural problems are real and need addressing. But routing
a portion of their profits toward politically-connected builders
and community groups will heighten, not lessen, the pressure for
keeping two sets of books.
Carl F. Horowitz is director of the Organized Labor
Accountability Project of the National Legal and Policy Center, a
nonpartisan foundation promoting ethics in public
life.
