But like a phoenix, Fannie and Freddie return under Johnson-Crapo, this time in the form of one giant mega-GSE (Government-Sponsored Enterprise) called the Federal Mortgage Insurance Corporation (FMIC). Johnson-Crapo supporters protest that the FMIC will be nothing like F&F, requiring private guarantors for Mortgage Backed Securities (MBS) and employing a host of federal agencies to regulate the housing and securities industries. But if you take a closer look at the details, your devil alert will set off like an air-raid siren.
As proposed, FMIC will require that private investors eat the first 10% of any losses before government guarantees (i.e., the taxpayers) kick in. As John Berlau of the Competitive Enterprise Institute points out, that still leaves taxpayers on the hook for 90% of the remainder of losses, giving private capital funds an incentive to make risky investments. Even this paltry 10% loss obligation of private investors is diluted in the bill's fine print, making taxpayer guarantees potentially even bigger. As if that weren't bad enough, FMIC is authorized to grant itself power to "repeal, amend or modify" its own rules or regulations. Does that sound like government getting out of the housing industry?
Johnson-Crapo may as well summon Barney Frank to come bounding back to the House Financial Services Committee, where he served as Chairman during the height of the mortgage meltdown. Frank, the colorful former Congressman with the signature accent of part Cambridge, Massachusetts and part Sylvester the Cat, was the one who assured us all that Fannie and Freddie were financially sound. Frank surely would applaud FMIC's continued mission to ensure 'fair' lending and continued facilitation of the Community Reinvestment Act (CRA) that requires banks make loans based on political, not financial, criteria.
And Frank surely wouldn't object to FMIC's unaccountable housing Trust Fund, which he labored for years to create until he got his wish in 2008. Slush funds were central to the operations of groups like ACORN and other 'housing advocates' to fund their political activities and lobby for liberal lending policies. They are not just a form of taxpayer abuse, but helped pay for the rudder that steered us right into the crash. It's a safe bet that this new Trust Fund will be equally popular with many groups that won't have the words 'Tea Party' in their name.
Frank also has a taste for using other people's money to fund failure, saying after the '08 crash, "there are a lot of very rich people out there whom we can tax... and recover some of this money." Well he's in luck, as Johnson-Crapo codifies an administrative “okey-doke” pulled by the Obama Treasury Department that authorizes the federal government to flat-out confiscate all private property of Fannie and Freddie shareholders, many of whom are retirees and pension funds who were encouraged by Uncle Sam to invest in F&F post-bailout. At the time, Fannie and Freddie were still reporting losses, but now that they're actually turning a profit, Treasury Secretary Tim Geithner ordered all profits back to the U.S. Treasury in perpetuity, even though the bailout loan has been repaid. Johnson-Crapo makes this stick-up permanent, which begs the question of how does it help spur private investment in the mortgage industry if government sets an example of confiscating whatever it wants without regard to private property rights? And these are the same politicians who said Enron was corrupt!
Democrats like Barack Obama and Barney Frank made it abundantly clear leading up to the housing crash that the purpose of GSEs like Fannie and Freddie was to make risky loans to push social change, and if everything should crash, well, we'll just soak the rich some more. The fact that the President favors Johnson-Crapo should serve as a red flag, and upon first glance this legislation embodies all the shady elements of cronyism and government fiat that, when under the name of Fannie and Freddie, have already done immeasurable harm to our nation. Johnson-Crapo is a great piece of legislation, if you are wistful for the days of Chairman Barney Frank.