The American Spectator

Special Report

Leveraging Fannie and Freddie

By Carl F. Horowitz on 8.4.08 @ 12:08AM

(Page 2 of 5)

This largesse goes back more than a decade. Since 1996, the Fannie Mae and Freddie Mac Foundations have given the CEF alone a combined $500,000. This pattern of generosity received a major boost in 1998, when Jackson accused Fannie Mae and Freddie Mac of racial discrimination and called upon major shareholders to sell their stock.

What has this money bought? In Freddie Mac's case, it would seem mainly bad publicity.

NOT LONG AFTER Jackson's shakedown attempt, the Freddie Mac Foundation provided $1 million for a Rainbow/PUSH "economic literacy" program. Reports eventually surfaced that Rainbow/PUSH were charging participating churches $1,000 to enroll -- a classic double-cross.

In a separate instance several years later, an independent report commissioned by the Freddie Mac board cited questionable company accounting practices, many centering on a major Jackson financial supporter, Ron Blaylock. Apparently, Blaylock received $250,000 for making a handful of phone calls to execute trades worth billions of dollars between Freddie Mac and his company, Blaylock & Partners.

Fannie Mae and Freddie Mac also have given generously to nonprofit housing groups. The corporations last year donated a combined $3.5 million to the Boston-based Neighborhood Assistance Corporation of America, or NACA, headed by one Bruce Marks, a self-described "bank terrorist," for counseling services. (The federal government, not to be outdone, chipped in another $15 million.)

NACA hasn't been the only recipient. The Fannie Mae Foundation during the course of 1980-2007 contributed nearly $800,000 to ACORN Housing Corp.

Such outlays might seem like pocket change for a major corporation. But remember, what matters in political leveraging is not the size of the grant, but the capacity of the recipient to affect costly institutional change.

This ripple effect has everything to do with new legislation that amounts to a bailout, even if certain persons (like President Bush) refuse to call it that.

Let's connect the dots.

FANNIE MAE AND Freddie Mac, based respectively in Washington, D.C. and McLean, Va., are known as "Government-Sponsored Enterprises," or GSEs. Though shareholder-owned corporations, the federal government considers their mission of maximizing homeownership to be of critical national importance.

Thus, the GSEs operate under an implied tradeoff. On one hand, each firm enjoys advantages unavailable to potential competitors, such as state and local tax exemption, and a $2.25 billion line of credit with the Treasury Department. In return, these firms subject themselves to stringent federal regulation.

Fannie Mae and Freddie Mae were created to provide mortgage market liquidity. As "secondary" lenders, their job is to buy mortgages from primary lenders -- e.g., banks, thrifts -- and then either hold them or package them into mortgage-backed securities (MBSs).

By linking mortgage and capital markets, this arrangement effectively ensures a steady flow of cash for primary lenders and a steady flow of bond income for Wall Street investors. What's more, it partly subsidizes the cost of borrowing, thus creating more homeowners. Everyone wins.

That's the official story anyway. The workability of this setup depends on one massive precondition being met: that borrowers make timely payments.

And what if they don't? What if instead large numbers of homeowners default on their loans -- like, say, now?

Letter to the Editor

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