or Login to see your representatives.

Access Candidates' and Representatives' Biographies, Voting Records, Interest Group Ratings, Issue Positions, Public Statements, and Campaign Finances

Simply enter your zip code above to get to all of your candidates and representatives, or enter a name. Then, just click on the person you are interested in, and you can navigate to the categories of information we track for them.

Public Statements

After Bailout, Fannie, Freddie Need Reform

Op-Ed

By:
Date:
Location: Unknown


After Bailout, Fannie, Freddie Need Reform

By REP. PAUL RYAN

When the Treasury secretary took the extraordinary step of announcing a plan giving unlimited authority to the federal government to bail out Fannie Mae and Freddie Mac, many of us asked: How much could this cost taxpayers? This week, the Congressional Budget Office provided an estimate; the short answer is "a lot" — $25 billion over fiscal 2009 and 2010.

This sizable amount underscores the fact that current policy toward Fannie and Freddie is not only dysfunctional and rife with bad incentives; it could also carry a large cost.

Fannie Mae and Freddie Mac are private corporations seeking to maximize profits for their shareholders, yet their liabilities are implicitly backed by taxpayers. This is a combustible mix. Armed with implied federal backing (and the much lower borrowing costs it provides them), Fannie and Freddie have grown so large that their failure could pose a significant risk to financial markets and our overall economy. The only option is to support them. But it is clear: Congress must reform these entities.

If we do not, the risks of this debacle occurring again on an even larger scale, with even larger costs, increase. That is unacceptable.

What these corporations actually do is a mystery to most, but is nevertheless important in facilitating access to low-cost credit. In a nutshell, they buy mortgages from banks, package them into financial securities, and sell them to investors. This secondary market infuses liquidity into the housing market, making it easier to get a loan at a lower interest rate so Americans can more readily buy homes. This is a laudable goal.

Became Monsters

Fannie and Freddie's second line of business — purchasing assets (mainly MBS or whole mortgages) for their own investment portfolios to deliver profits to shareholders — serves no clear social purpose. Since 1990, Fannie's and Freddie's investment portfolios have grown tenfold, from $135 billion to $1.4 trillion as of late last year — an astronomic increase that has been fueled by their ability to borrow at preferential rates due to their implied government backing.

This implied backing is the key reason they have become behemoths whose financial market obligations (their debt and their guaranteed MBS) nearly match the federal government's entire public debt and dwarf the economies of such nations as Germany and Canada. These securities are widely held by banks, insurance companies and central banks around the world and are generally perceived as safe investments. If Fannie and Freddie failed to meet their debt and MBS obligations, the implications for the housing and credit markets could be disastrous.

The common notion that the federal government stands behind these corporations is confirmed by the administration's proposal. While Treasury's plan addresses the immediate threat to the housing and financial markets and our economy, it doesn't address the fundamental problem that led us here.

By making the federal backing ironclad, the problem is aggravated. Fannie and Freddie remain for-profit corporations, but still enjoy federal guarantees against any risk of loss. They would keep their ability to profit from risk that is ultimately borne by taxpayers.

No More Bailouts

The solution is to make them fully private or fully public. Their current states are too precarious. To make them private entities entails stopping the special treatment they now receive: no more congressional charter, no more special regulatory rules, no more exemption from state and local taxes and no more statutory ability to borrow up to $2.25 billion from the U.S. Treasury.

Optimally, they could be broken up into regional entities, or into smaller components that actually compete in the secondary mortgage market. The bottom line: Private markets, rather than a link to the federal government, should shape their size and operations.

The other option is to convert these corporations into a fully federal entity. If taxpayers are going to be at risk of financial loss, Fannie and Freddie should at least be honestly placed within the federal budget.

Fannie Mae (the Federal National Mortgage Association) was created as a government agency in 1938 and operated as such until 1968 when it was taken out of the budget. Freddie Mac (Federal Home Loan Mortgage Corp.) was established two years later as a private corporation. Returning Fannie to its previous status and putting Freddie on to the books is not radical, as the federal government is already in the same business. Ginnie Mae, a government-owned corporation, securitizes about $200 billion a year in mortgage-backed securities and is fully backed by the federal government, but is limited to loans guaranteed by government entities such as the Federal Housing Administration.

The worst option is the status quo. Failure to reform will only result in more taxpayer-funded bailouts in the future.

Ryan, a Republican from Wisconsin, is the ranking member of the House Budget Committee and sits on the Ways and Means Committee.


Source:
Back to top