Housing Market Not ‘Too Big To Fail,’ But ‘Too Regulated To Succeed’

Housing Market Not ‘Too Big To Fail,’ But ‘Too Regulated To Succeed’

The Obama administration is again destabilizing the housing market and seizing investors’ returns on their money.

The Great Recession of 2008 that touched nearly every aspect of our economy can be traced the housing market bubble, artificially inflated by years of failed federal mortgage and housing policies, and bad actors in the marketplace. Now that the housing market is beginning to recover, America has the opportunity to fully emerge from its economic malaise and get back on the track of sustainable long-term growth. However, the Treasury Department’s continued meddling in the secondary mortgage market signals Washington hasn’t learned from 2008, and is still standing in the way of common-sense housing solutions.

The secondary mortgage market is driven by a pair of government-sponsored enterprises, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Although Congress chartered Freddie and Fannie, they have been publicly traded for more than 40 years, and their shareholders control more than $15 billion in combined equity.

Freddie and Fannie were at the center of the chain of events leading up to the 2008 collapse, but for most of their history, the twin enterprises have played a positive role in making more capital available for borrowers. Freddie and Fannie trade in secondary mortgages—purchasing mortgages from banks and other primary lending organizations, and either holding the mortgages as investments or selling them for profit as mortgage-backed securities.

For most of their history, the twin enterprises have played a positive role in making more capital available for borrowers.

Although government-sponsored, at its best the secondary mortgage market is a well-oiled machine of free-market capitalism. By selling mortgages to Fannie and Freddie, banks can recover their loaned capital immediately (instead of waiting for the borrower to pay it back over 30 years), giving them greater cashflow and flexibility and allowing them to make more investments and offer more mortgages to home buyers. This increased flexibility and capital availability naturally reduces interest rates for borrowers, making mortgages more attainable for middle-income earners. The mortgage-backed securities market Fannie and Freddie drive also creates additional high-yield investment options for high-dollar investors.

Enter Federal Meddling

Conceptually, Fannie and Freddie’s model works—but because both are bound to the government, it’s easy for politicians to use the enterprises to play high-stakes poker with the housing market. Clinton-era housing policies, driven by the Progressive sentiment that everyone should be able to own a home regardless of their capacity to make monthly mortgage payments, forced Fannie and Freddie to lower their market-driven risk standards and take on high-risk loans (including subprime loans to borrowers with credit scores that would normally be insufficient to obtain a mortgage). This multi-trillion dollar gamble worked for a while, until a critical mass of borrowers defaulted on the bad loans, triggering a domino effect that rolled through Fannie and Freddie and crashed the mortgage-based securities market, which brought about the recession from which we’re still recovering.

Fannie and Freddie have recovered, but the government that nearly drove them into oblivion by forcing them to buy subprime mortgages continues to dangle the two corporations for political and financial gain. In the wake of the financial collapse, a government regulatory agency called the Federal Housing Finance Agency seized Freddie and Fannie in an ostensible emergency measure that hasn’t been lifted. FHFA’s seizure may have saved these enterprises from bankruptcy in the short term, but as Fannie and Freddie recovered, the government recognized them as immensely valuable assets and refuse to let go of them.

Inflating Another Housing Market Bubble

In the years since, the government has furthered tightened its grip on the secondary mortgage market. In 2012, the unelected Treasury Department mandated that Fannie and Freddie surrender all profits to the government, despite both enterprises having long since repaid their shares of bailout money. This unwarranted seizure of assets has crippled the thousands of shareholders who, as part owners of Fannie and Freddie, should be entitled to shares of their profits as dividends. The government has effectively stripped these private citizens of their ability to capitalize on their investments, all to avoid giving up power over Fannie and Freddie.

The government has effectively stripped private citizens of their ability to capitalize on their investments, all to avoid giving up power.

Moreover, the Obama administration is now actively trying to sell off the 79.9 percent federal stake in Fannie and Freddie through backroom deals, further interfering with the enterprises’ ability to operate normally and shareholders’ ability to control any part of their investment. That is, the part owners who have held their money in the two enterprises for years may suddenly find themselves at the behest of a new sheriff in town. This backroom selloff is the equivalent of the government taking any other publicly traded corporation—think Microsoft, Apple, or McDonald’s—away from its shareholders on a whim, and selling it for profit to a political ally, in blatant disregard of the basic laws of corporate ownership.

Fannie and Freddie worked well both as profitable enterprises and public services when their private shareholders operated them like any other publicly traded corporations, with limited influence from the government. Now, these shareholders have been stripped of their rights as legitimate investors in these enterprises, all because their government has decided the organizations they once deemed “too big to fail” are now too valuable and influential to let go.

The best thing the government can do for the housing market is to let Fannie and Freddie go—not to a hand-picked partner through a backroom deal, but to the people with legitimate financial interests in the enterprises. The Treasury Department’s tight management of Fannie and Freddie is symptomatic of a broader desire to continue to interfere in the housing market against every lesson we learned in 2008. It’s Washington putting its own interests and priorities first, and private investors, free-market capitalism, and the stability of the housing market second. Freddie and Fannie may or may not be too big to fail, but right now the government’s grip is too tight for them to succeed.

Erik Telford is senior vice president of the Franklin Center for Government and Public Integrity.
Photo By: Mike Licht
Photo By: Jeff Turner
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