Fannie Mae and Freddie Mac together own or guarantee almost half of the $12 trillion home mortgage debt. In an attempt to rein in Fannie Mae and Freddie Mac, President Bush, on July 30, signed into law a package to resurrect the mortgage industry by pumping in $300 billion to help distressed homeowners get more affordable, government-backed mortgages and get out from under risky mortgages they cannot afford. The new law creates a stronger regulator for the two companies and gives the government the option to take equity stakes if the two companies run into trouble. In order to spur home buying, it offers tax breaks, sets up the first national licensing system for mortgage brokers and loan officers, and raises the limit on the size of mortgages that Fannie Mae and Freddie Mac can guarantee. The markets welcomed the new law and the shares of the two companies initially rose.
But whether the new law will succeed in reining them in is doubtful. The main reason the law might fail is the immense lobbying clout of Fannie Mae and Freddie Mac, which is imminent from the fact that a proposal to eliminate their lobbying budgets was not even put to a vote on the Senate floor. Majority Leader Harry Reid refused to allow a vote on Republican Jim Reid’s amendment to bar political donations and lobbying by the two companies.
Lobbying by Fannie Mae and Freddie Mac is nothing new. According to an editorial in The Wall Street Journal, the political action committees of the two companies have already distributed roughly $800,000 to U.S House and Senate members this election cycle.
According to the Fannie Mae Foundation website, Jesse Jackson’s Citizenship Education Fund has received $660,000 from Fannie Mae alone since 1996. In the 1990’s Jesse Jackson accused these companies of discriminatory lending practices, but the allegations disappeared once the money started flowing.
On the positive side, the law aims to alleviate home foreclosures via a government guarantee that both penalizes the lenders and gives the government a share of the upside if prices recover. But this provision is voluntary and is likely to have only a few takers. Throwing government cash at a market that is already heavily distorted by tax breaks and subsidies is certainly not a good idea, especially at a time when house sales, if not prices, look at last to be bottoming.
There is virtually no protection for the American taxpayer. It imposes no changes in management or approach on the companies and no penalties on shareholders. The current arrangement allows managers and shareholders to take all the profits and leave the losses to the taxpayer. Under the pretext of protection, the new law gives the treasury secretary the right to dictate terms if the government does have to stump up equity capital and create a new regulator.
The new law might not succeed in reining in the two companies. It has too many loopholes. Loopholes apart, unless lobbying by the two companies is barred, the taxpayer might end up paying a heavy price to save these companies. There is no reason to permit these two companies to lobby Congress when government departments are not allowed to do so.
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The GSE reforms are found on pages 14-394 of the new housing bill. For those that want to read or print out a page or more of the new housing bill you can read or download it at
http://www.ushousingmeltdown.org/2008-housing-law.asp.
There is a handy table of contents so you can read or print just the areas you have an interest in. On page 55 executive compensation is addressed and on page 84 you’ll find how golden parachutes are dealt with.