Some people – our President perhaps being the most high-profile among them – blame “greedy bankers” for the mortgage market collapse of last decade, yet Fannie and Freddie, complete with congressional approval, played a role as well. While the intended agendas of these two institutions may be worthwhile, they nonetheless create a scenario where a whole lot of banking and financing power is placed in the hands of politicians. That power can be used as a tool to accomplish the short-term political goals of those politicians, and in the aftermath of the 2008 economic crisis, evidence emerged suggesting that this is a big part of what happened.
In 2003, before last decade’s real estate boom took-off, the Bush Administration repeatedly attempted to introduce legislation in the Congress that would have significantly reigned-in the lending behaviors of Fannie and Freddie. At one point in 2005, after former U.S. Senator Chuck Hagel (R-Nebraska) introduced a GSE reform bill in the Senate, Freddie Mac paid a Republican consulting firm$2 million to help “kill” the bill. As a result, then-Senate Majority Leader Bill Frist (R-TN) never allowed the bill to go to a vote, and it “died.”
In 2007, after the run-up in real estate values and sales, President George W. Bush himself proposed “subprime reforms” noting an alarming rise in subprime mortgage defaults, but both Democratic and Republican members of Congress refused to support those attempts (Democrats controlled both the House and The Senate by then).
According to a report in the August 5, 2008 edition of the New York Times, David Andrukonis, the former chief risk officer for Freddie Mac, notified Freddie’s Chief Executive as far back as 2004. Apparently there was knowledge back then that Freddie was buying bad loans the likes of which “would likely pose an enormous financial and reputational risk to the company and the country.”
Later in 2008, after the housing bubble had burst, Freddie’s CEO Richard Syron stated in another interview that, “This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things.”
So if Fannie and Freddie could be so easily manipulated by members of Congress, what could possibly go wrong with efforts to “reform” the institutions? The supposed goal of the Corker-Warner bill is to create a system that provides would-be borrowers with continued access to long-term, fixed-rate mortgages (with some sort of government guarantee on their loan) while limiting the risk taxpayers will ever face losses. The fear of liberal Democrats is that if the government ceases to guarantee private loans, a 30-year fixed rate mortgage will eventually be out of reach to the middle class. Republicans, on the other hand, worry about taxpayers subsidizing private loans and a continuation of the “too big to fail” philosophy with select banks.
While the Corker-Warner bill seeks to shut-down Fannie and Freddie, it nonetheless creates an entirely new governmental agency, the Federal Mortgage Insurance Corporation (FMIC), which would use taxpayer dollars to prop-up private loans. While many Republicans are skeptical of the idea, a report from Reuters’ news indicates that U.S. Senator Mike Crapo (R-Idaho), the most powerful Republican on the Senate Banking Committee, is warming up to the idea and working closely with Committee Chairman Senator Tim Johnson (D-SD).
Will replacing one government entity with another actually improve the mortgage markets? If politicians retain control over our wealth, they will most always find a way to use it for their own selfish purposes.
Austin Hill is an Author, Consultant, and Host of "Austin Hill's Big World of Small Business," a syndicated talk show about small business ownership and entrepreneurship. He is Co-Author of the new release "The Virtues Of Capitalism: A Moral Case For Free Markets." , Author of "White House Confidential: The Little Book Of Weird Presidential History," and a frequent guest host for Washington, DC's 105.9 WMAL Talk Radio.