Proposed Fannie, Freddie Replacement: ‘Obamacare of the Housing Finance Industry’
(CNSNews.com) – Former Housing and Urban Development undersecretary Ken Blackwell compared a bill passed last Thursday by the Senate Banking Committee that would replace Fannie Mae and Freddie Mac with a larger government-sponsored enterprise (GSE) to Obamacare’s takeover of the health care industry.
“We think that it discourages private investment, and the new agency that it has created makes it tantamount to the Obamacare of the housing finance industry,” Blackwell told CNSNews.com.
Blackwell is currently a director of the Coalition for Mortgage Security (CMS), which opposes the measure.
The bipartisan bill, sponsored by Senate Banking Committee chairman Sen. Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID), passed the committee May 15th on a 13-9 vote. It would repeal the federal charters of Fannie Mae and Freddie Mac and replace them with a new independent entity called the Federal Mortgage Insurance Corporation (FMIC).
But critics are calling FMIC “Fannie and Freddie on steroids.”
“This is another instance where government is taking over one-sixth of our economy,” Blackwell said. “It’s already done it in health care, it is discouraging private investment and innovation in the energy industry, and we see that this legislation would also add $5 trillion to the liability side of the federal budget balance sheet that would tempt rating agencies to demote government bonds once again.”
CNSNews.com asked Blackwell if he was surprised that Senators Johnson and Crapo are trying to create an even bigger version of the two GSEs that played such a key role in the 2008 housing market collapse.
“What I think I’m surprised at is that what they have proposed is a bigger mess, a bigger federal bureaucracy than the two entities that they are professing they want to fix,” Blackwell replied. “There’s general agreement that we should wind down the two entities [and] attract more private capital. The question is how we best do this, and we think Johnson-Crapo is not the way to do it.”
Leaders of 26 conservative and free-market groups urged Congress to reject the bill, noting in an April 22 letter that FMIC would just be “an expansion of the type of government intervention that fueled the housing crisis in the first place.”
Blackwell noted that the proposed agency would not eliminate the problem of moral hazard, in which banks made risky sub-prime loans because they knew they could sell them to Fannie and Freddie. After being bailed out by the federal government in 2008, both still remain under federal conservatorship.
Since at least 95 percent of mortgages sold in the U.S. are currently backed by Fannie and Freddie, Blackwell says he fears FMIC could set the stage for a second housing bubble.
“What I fear is that the replacement agency that Johnson-Crapo would create would in fact trigger another great catastrophe in the housing market. And that’s why we think that there’s some guiding principles, you know, that have to be appreciated as we wind down Fannie and Freddie. And that is that they would be replaced with private companies, funded by private capital, without any special privileges or federal charter.
“You know, the rule of law is the basis for American capitalism and must be acknowledged and respected in order for properly functioning capital markets. Again, this is the cornerstone for attracting private capital into any market, but especially the housing finance market.
“And therefore, whether it is the Heritage Foundation or Ralph Nader’s group, people see Johnson-Crapo furthering an assault on capital and a disregard for the rule of law, and therefore you’re not going to be able to attract the private capital, and what you get is a another government-controlled mess.”
Blackwell added that the Treasury Department has not kept its promise to private investors, including pension, hedge and mutual funds, community banks, and many middle-class individuals who purchased stock.
“In 2008, the government took over those two agencies and actually said that what they were going to do was to make taxpayers whole, and then they would in fact take care of investors who had participated in the bailout,” he told CNSNews.com. “Well, Fannie Mae and Freddie Mac are now returning profits, taxpayers have been made whole, and the private investors have been trampled upon.
“This has given rise to an interesting coalition of folks who have expressed concern, and that’s why I think the committee’s vote was sharply divided, and that sharply divided vote doesn’t bode well for the proposal being advanced at any near date,” Blackwell said.
Under the August 2012 “sweep amendment”, the federal government unilaterally rewrote its $188 billion bailout agreement and began requiring Fannie and Freddie to hand over 100 percent of any future profits to the U.S. Treasury, effectively wiping out all private investors and preventing Fannie and Freddie from rebuilding their capital reserves.
Last Friday, Melvin Watt, director of the Federal Housing Finance Agency (FHFA), the conservator who oversees Fannie Mae and Freddie Mac,said that “I don’t lay awake at night worrying about what’s fair to shareholders.”
"Secretary Watt's unfortunate, and somewhat shocking, statements betray an arrogance on the administration's part that is not helpful in the effort to effectively - and equitably - reform Fannie Mae and Freddie Mac so the public can feel confident going forward," Blackwell replied in a statement.
"After the financial disaster our country experienced in 2008-09, a disaster many are still recovering from, he ought to lay awake every night concerned with shareholders, taxpayers and all Americans who have a stake in ensuring such a collapse never happens again," he said.
“I think the clear takeaway from this is that there is a growing, bipartisan, multi-faceted coalition of citizens that have actually said, ‘Hold on. Let’s get this right. What’s the big rush to go headfirst into another government-dominated morass?’” Blackwell told CNSNews.com.
“So the real debate is how to move from the current system to the goal, how to do so without creating an even bigger mess, and how to do so without trampling on the rights of Americans as homeowners and as investors.”