Fannie Mae/Freddie Mac identity crisis imperils taxpayers

August 22, 2008|By JAY HANCOCK

Few chapters in the annals of corporate welfare are as impressive as the one on Fannie Mae, the troubled mortgage concern.

Oil companies rely on cut-rate government drilling leases to tilt things their way. Sports teams use stadiums built with taxpayer dollars. Big Sugar gets federal trade walls against competition.

But Fannie Mae is the only Fortune 100 company that used to be a federal agency. Imagine if the Federal Reserve decided to sell stock to the public. You might get in on that action, right?

Unfortunately, the setup isn't working so well lately for shareholders or taxpayers.

Fannie Mae's double life (half government, half Wall Street) has finally been exposed as it approaches collapse. What it will look like after the rehab is important not just for Fannie investors but for homeowners and taxpayers everywhere.

Washington-based Fannie has propelled the U.S. housing market for decades. Together with McLean, Va.-based Freddie Mac (a "competitor" set up after Congress realized a government-sponsored mortgage monopoly wasn't such a great idea), Fannie buys mortgages from banks, thrifts and other originators. This gives lenders new money to make new loans.

The companies are supposed to earn lots of profits for shareholders and make mortgages as affordable as possible, especially for the poor and minorities.

The impossibility of such a mission was captured a couple weeks ago by Freddie CEO Richard Syron, who told The New York Times: "Frankly, if I had perfect foresight, I would never have taken this job in the first place."

The companies have concentrated mainly on the profits. Because everybody thought (correctly, as will soon be proved) that government would bail them out if needed, Fannie and Freddie borrowed at below-market rates. They then lent at market rates, creating huge, abnormal returns.

Executives earned tens of millions. A thousand dollars invested in Fannie stock in 1980 was worth $1 million by the middle of last year, including reinvested dividends. (I triple-checked because I couldn't believe it.)

Loans to the poor and minorities? Yeah, they made a few of those, too.

Don't blame Fannie and Freddie as the main villains in the mortgage collapse. The worst loans got issued and bought by others. Blame them as well as the Federal Reserve and other regulators for letting it happen.

But Fannie and Freddie are partly at fault. They could have been putting millions of marginal borrowers into safe, fixed-rate loans instead of sending them into the arms of the subprime predators. Fannie and Freddie eventually were seduced into buying lots of less-than-prime loans themselves after they saw how much money everybody else was making.

The profits, of course, were temporary or illusory. The housing collapse is bringing down Fannie and Freddie, along with many other financiers. Their stock is down more than 90 percent from a year ago.

Fannie and the Treasury Department deny a government bailout is coming. Nobody believes them.

President Lyndon B. Johnson privatized Fannie Mae 40 years ago because he didn't want its debt on the government books, constraining his ability to finance the Vietnam War. But as Enron showed us, off-balance-sheet liabilities have a way of coming home to roost.

The job is to fix the immediate crisis as well as the problem of Fannie's and Freddie's conflicting missions. Former Federal Reserve boss Alan Greenspan wants the government to pay off the companies' creditors, dismember them and sell pieces to private investors.

But that would leave nobody in Washington with the mission of making sure qualified borrowers can always get mortgages and of aiming loans (responsibly!) at the poor and lower middle class.

It might make sense to return Fannie Mae to its Depression-era roots, when it was a smaller, pure-government program. Sell most of it to Wall Street. But keep part as a self-financing catalyst for needy parts of the mortgage market.

Don't want a new government agency? Give a downsized Fannie/Freddie's duties to the Federal Reserve, the nation's central bank.

Then government can be government. Wall Street can be Wall Street (although with new regulations). And the Fannie/Freddie identity crisis won't let investors reap jillions while taxpayers bear the risk.

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