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A Further Perspective
The Two-Headed Wooly Mammoth
Fannie and Freddie should have been treated by Dr. Kevorkian years ago.
This time it’s not an elephant in the room that no one sees, it’s a large, two-headed wooly mammoth. It subsists on endless amounts of money. Each head has a name. One is named Fannie Mae and the other is named Freddie Mac.
If you were a wooly mammoth you, too, would want to have a name that is deceptively innocent sounding, almost cuddly. Like the wooly mammoths of prehistoric times, however, this one is anything but cuddly.
Fannie was created toward the end of the Depression, in 1938, to add to liquidity in the home mortgage market. It puttered along until 1968 when it was converted to a private, but government-sponsored, shareholder corporation. This had the handy effect of taking it off the federal budget. Although the government would no longer guarantee Fannie-issue mortgages, Fannie’s government-sponsored status implied the “full faith and credit” of the government behind it, and business grew as a result.
In 1970. Freddie Mac became Fannie’s younger brother for the purpose of stimulating competition. Then, in 1977, the Carter Administration and its Congress passed the Community Reinvestment Act. In exchange for banks receiving federal insurance of their depositors’ money, the CRA required them to “help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.”
This was intended to end the practice of “redlining,” in which a bank wouldn’t lend in an entire neighborhood so marked. It was to be replaced by making mortgage decisions on a case-by-case basis. Things moved along until 1999 when officials of the Clinton Administration pressured Fannie to pressure banks to increase the number of their loans in urban areas that had been designated by the CRA as “distressed.” Meanwhile, community groups (remember Barack Obama, “Community Organizer”?), using the disruption tactics of radical Saul Alinsky, began picketing and intimidating banks they thought were dragging their feet.
Fannie’s demand that lenders increase their ratio of low-income loans led to pressure on it to lighten credit requirements it had maintained as to which mortgages it was willing to purchase.
Subprime lending grew like Topsy. Rep. Barney Frank was a cheerleader for this rapid expansion. Fannie’s shareholders loved the steady profits. Its executives (several of them former Clinton Administration officials) loved their big bonuses.
All this led to more subprime lending and the tricky, new convoluted mortgage schemes in the market. The whole bubble began to come apart at the seams in late 2007. The New York Times showed prescience back in 1999 when it wrote, “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times, but the government-subsidized corporation may run into trouble in an economic downtown, prompting a government rescue similar to that of the savings and loan industry in the 1980s.” And that is what happened.
By summer 2008, Fannie and Freddie, between them, were backing more than half of the nation’s home mortgages and they were in the red. By August that year, their share prices had dropped by 90 percent. In September, the federal government took over both, putting them under conservatorship. The U.S. Treasury now owns 80 percent of both through preferred stock and common stock warrants.
Instead of planning to phase them out, the government vowed to keep them running. It has pumped $127 billion into the two since the takeover, with no end in sight. Indeed, the Obama Administration has lifted restrictions on borrowing by the two-headed mammoth with the big appetite.
Senator Chris Dodd’s finance “reform” bill conspicuously leaves out any reference to either Fannie or Freddie. What should happen to both is euthanasia. Like Dr. Kevorkian’s death machines, the plan to do so should be built carefully and, unlike Dr. Kevorkian’s, which work in minutes, the euthanasia should be phased in over a reasonable period of time so they can fall into the long, long sleep of real wooly mammoths.
About the Author
Peter Hannaford was closely associated for a number of years with the late President Reagan, beginning in the California Governor’s office. His latest book is Presidential Retreats.
Letter to the Editor View all comments (17) | Leave a comment
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Jim O'Brien| 5.26.10 @ 8:08AM
Chris and Barney threw gasoline on the flames at Fannie and Freddie. It is enough to make one vomit to think that Chris and Barney are now the firefighters. Maybe they too will win a Nobel Prize?
JimH| 5.26.10 @ 8:17AM
Would that make Barney a flaming..? Nah to easy.
Timothy L. Pennell| 5.26.10 @ 8:54AM
And what two words are MISSING, in the CROOKED SON of a CROOKED FATHERS' Financial reform Bill? Why, FANNIE and FREDDIE, of course.
Mustn't kill the Golden Goose.
DatsunMark| 5.26.10 @ 11:20AM
Fannie and Freddie are the Federal Reserve to the Home loan market via buying the loans from the lenders thereby preventing these smaller S&L's, banks, etc from becoming *loaned up*. My first home loan required I could not be loaned more than what my monthly payment equaled or less than 1/3 my monthly income. In this case, this ponzi scheme worked for awhile. As much as I blame Dodd and Frank (both of whom look as if they could change a $9 bill in $3's) GWB and the republicans could have caught this but didn't. Thanks to GWB we got Hank Paulson, whom quarterbacked the fix for his connected friends.
BILL| 5.26.10 @ 12:37PM
Datsun,
McCain caught it way back in '04 and '05 along with other republicans. Couldn't get enough votes to overcome cloture to reform the twin F's.
Matt| 5.26.10 @ 11:24AM
Government can't really control the economy without the help of the un-controlled Fed, Freddie & Fannie. With Obamacare, strict controls on Wall Street, Cap & Trade, what else is there for a government takeover? The answer, not much.
tacho universal | 5.26.10 @ 9:12PM
Inside your BLOG learned a lot, thank you and share your success and happiness. Note silently in the distance a view of your friends.
R Martin| 5.26.10 @ 1:37PM
I only hope Ben Stein reads this piece and comes to understand it was not Wall Street which caused the current economic crisis, but government.
PolishKnight| 5.26.10 @ 5:42PM
Let's keep one thing in perspective: I STILL hear people, including conservatives, saying: "You can't go wrong buying land! Real estate ALWAYS goes up! I bought a house 30 years ago and the value went up so that makes me a GENIUS! Location, location, location! Paying $500K for a 1 bedroom condo in Hawaii can't go wrong!"
Freddie and Fannie are symptoms of the popular political sentiment to artificially inflate real estate prices even if at the expense of the overall economy since so many homeowners vote. It's a socialist scheme.
A real conservative advocates telling the banks to cut their shadow inventory loose and allow prices to fall where they should be: About half where they are now in many markets. But how popular would that be?
Danny L. Newton| 5.27.10 @ 3:48AM
After watching CSAN and seeing the plan to have a national infrastructure bank, I suspect that Fannie and Freddie are going to have another sibling. I think the plan is to convert the Highway Trust Fund into cash that will be sent to the Federal Reserve and end up as money that is used to build transportation infrastructure. Europe does this so it is not going to get critical scrutiny. The bank can multiply the money by taking in the federal tax funds and issuing credits for the amount sent to the Federal reserve divided by the fractional reserve requirement. The transportation money supply could be increased maybe by a factor of 8 or so. Instead of pay as you go, the bank will issue bonds or debt to the states.
The Highway Trust Fund is chronically broke because it is not indexed to inflation and CAFE standards plus the bad economy is dropping income. Promises to end the donor state situation is also damaging the fund. General funds are required to prop up the Highway trust fund so this plan takes transportation out of the targets of those want to go after discretionary spending in a magical thinking sort of way.
Oldefarte| 5.27.10 @ 11:19AM
The CRA's intended elimination of 'redlining' was emphasized by liberals as being beneficial to previously denied seekers of credit, when in fact 'redlining' as a necessary banking/financial tool to prevent exactly what has/is now happening in our real estate/credit implosion. 'Redlining' was used by financials to draw a red line around geographical areas of all geographical sections of metropolitan cities commonly referred to as SLUM AREAS OF TOWN. The inhabitants of same, with little or no income/assets/jobs,etc were/are not reliable prospects as loan applicants. For banks to provide mortgages/loans to these people would eventually mean same not being paid back and therefore representing a loan loss/expense to the banks/financials. The CRA essentially forced banks into providing WELFARE to these unworthy loan applicants, and you/me and all taxpayers are now PAYING FOR these worthless loans/mortgages through our governments WEALTH REDISTRIBUTION policies. It's nothing but FORCED CHARITY!!!!!
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