Possibly as early as today, the Senate will vote on a housing bailout bill that has been debated for months. The vote comes on the heals of news from Wall Street that the shares of government-sponsored entities Freddie Mac and Fannie Mae have plummeted as worries about the companies’ financial solvency grow. Both companies closed at their lowest levels in more than 15 years, and Fannie’s share price is down 76% from a year ago, while Freddie is down 83%.
Congress created Freddie and Fannie to help increase home ownership by expanding the flow of money into the housing market. Ruthlessly leveraging their government backed advantage to borrow money at lower rates, Freddie and Fannie have metastasized into a housing market leviathan that is far too big for the federal government to allow to fail. Combined, Freddie and Fannie have $5 trillion in liabilities from mortgage-backed securities and other debt. To put that in perspective, the total U.S. federal debt is $9.5 trillion and total U.S. gross domestic product is $14 trillion.
Fannie and Freddie are at the core of the housing crisis. In 1995 Fannie and Freddie convinced the Department of Housing and Urban Development (HUD) to let them get affordable-housing credits for buying subprime securities that included risky loans to low-income borrowers. In 2003 Fannie and Freddie bought $81 billion in subprime securities. In 2004 they bought $175 billion — 44% of the subprime market. Due to higher-than-expected mortgage default rates, Fannie and Freddie have suffered combined losses of more than $11 billion in the nine months ended March 31.
Conservatives have been calling for major reform of Freddie and Fannie for years. And Washington is beginning to listen. “What’s the No. 1 thing that could be done? What’s the thing that will make the most difference? By far, by far it is the confidence that will be injected in that marketplace and the secondary marketplace through those institutions when reform is done,” Treasury Secretary Henry Paulson said in a speech this week. The Senate bill scheduled for vote today does contain many needed reforms for the GSEs. But it also contains major provisions that can only deepen taxpayer exposure to bad mortgages.
The bill allows the Federal Housing Administration to essentially buy $300 billion worth of troubled mortgages. Since it is a voluntary program, banks will only choose loans that are most likely to default to pass on to the taxpayer. Worse, the bill increase the cap on the size of a loan Freddie and Fannie can repackage and sell to investors. The Senate bill raises the cap from $417,000 to $625,000 (the House bill raises it to $729,750). The Wall Street Journal quips: “Chuck Schumer, Chris Dodd and many others have encouraged the duo to take on even greater mortgage risk as the housing slump has unfolded. They’re the arsonists posing as firemen while putting more dry tinder around the blaze.”
Considering that the worst of the current housing crisis may be over and that analysts at the CBO conclude the bailout portion of the bill would do nothing to help the economy, conservatives should not feel pressured to agree to increased taxpayer liability to address the current crisis in exchange for essential reform of government-sponsored entities to prevent a future crisis.
- Iran test-fired more long-range missiles Thursday in a second day of exercises aimed at showing the country’s weapons can reach Israel.
- Sen. Barack Obama joined with 69 Republicans and moderate Democrats to pass a bill that brings the Foreign Intelligence Surveillance Act into the 21st century.
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