Fannie Mae and Freddie Mac and Political Ugliness

Don't get me wrong!  I think that Fannie and Freddie have been wonderful institutions for homeowners in the last 15 or so years. They have basically been the mortgage market for most Americans.  But what a mess they are in today, and it's not like this crept up on us.  Forgetting that they have been great conduits for trillions of dollars of loans, they have also been a hotbed of executive malfeasance and questionable practices and poor judgments.

Back in 1993, Congress created the Office of Housing Enterprise Oversight, OFHEO. However, it appears that Congress stalled any attempts at real regulation back then and they have been doing it right up to today.  Here is a story dated 1999.

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders."

In the same article there was this warning from Peter Wallison a resident fellow at the American Enterprise Institute.

"If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

Here is another story from 2003 when it appeared obvious that OFHEO’s regulatory efforts had been inadequate. Here is a statement from Representative Michael G. Oxley:

"We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,"

A new plan was proposed to transfer financial regulatory authority to a new entity.

"Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac."

That proposal went exactly nowhere, largely due to two factors, intense lobbying by Fannie and Freddie and the effects of their political contributions to the legislators who were in charge of writing laws about regulation.

Obviously, the warnings went unheeded and we see the result. Now the OFHEO has a new name, the Federal Housing Finance Agency, and a new mission, being the Conservator of the GSEs.

Finally, the good news is that both enterprises have new CEOs who are "financial" people instead of being "political" people. That change augers well for the future.

An issue still to be explored in coming weeks is the use of the GSEs, and ultimately our tax dollars, to promote a social agenda without regard to the financial consequences.