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.
