The Five Percent Solution - The American Spectator | USA News and Politics
The Five Percent Solution

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.

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