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The Hill - Behemoths Fannie and Freddie Bankrupting the US

Op-Ed

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BY Sen. John McCain and Rep. Jeb Hensarling

In a category more worthy of shame than admiration, the award for the biggest government bailout goes not to AIG, General Motors or Bank of America, but to the financial behemoths known as Fannie and Freddie. To date, these loss-making government-sponsored enterprises have cost the American people more than $150 billion, with potentially tens of billions more yet to come.

For several decades, Washington has subscribed to what is known as the affordable housing mission, which states that homeownership is not only an opportunity worth protecting but an actual right to be upheld by government. Fannie Mae and Freddie Mac -- two government-sponsored enterprises (GSEs) -- were granted government monopoly power over a significant segment of our housing market to securitize mortgages for those who, in many instances, could not afford them.

Thanks to their government guarantee, Fannie and Freddie easily underpriced all private competition, creating a system in which they ultimately privatized their profits and socialized their losses. Meanwhile, financial institutions were mandated, incented or cajoled into loaning money to pay for irresponsible home purchases.

The result? With record levels of homeownership -- and with 13 percent of homes in America being vacant -- came inflated home prices, record numbers of foreclosures, billions in losses paid for by the American taxpayer, and trillions of dollars in exposure to potential future losses. Ultimately, expensive GSE subsidies have ended up benefiting borrowers little or not at all. This is federal policy run amok.

It is time to enact fundamental GSE reform before these companies go from "too big to fail" to "too late to fix." It is time for the sun to finally set on the age of Fannie Mae and Freddie Mac as we know them.

Unlike their private competitors, which have suffocated under the weight of government-sponsored competition in recent years, these financial Frankensteins were created not in the competitive marketplace but in a federal lab in Washington where they exerted vast influence and avoided prudent regulation. Because of their specially granted government privileges and backing, they guaranteed 70 percent of the nation's mortgage-backed securities market in 2010.

According to the Federal Housing Finance Agency, if left in their current mold, Fannie Mae's and Freddie Mac's total cost to taxpayers could be $363 billion.

At a time when America is already more than $14 trillion in debt -- a national record, almost surpassing our GDP -- Washington simply cannot continue to sink billions of dollars into these failed companies.

That is why we re-introduced the GSE Bailout Elimination and Taxpayer Protection Act -- legislation that will immediately end the GSEs' affordable housing mandate and begin a five-year transition process to return the mortgage market back to a competitive environment.

Fortunately, there seems to be a consensus emerging on both ends of the political spectrum about the gravity of the situation and the need for a free-market future for Fannie and Freddie.

Last month, the Obama administration released a report on "Reforming America's Housing Finance Market" that listed three policy alternatives for going forward. The first of these options is a free-market plan similar in content to the legislation we proposed.

While critics of reform seem to be more concerned with protecting the government's role in housing-sector distortion, we hope members of Congress will support our effort to finally take Fannie and Freddie off the permanent taxpayer bailout list and return them to a competitive marketplace.

By instituting a path for Fannie and Freddie to become free-market participants, the bill would help homebuyers stay homeowners, and free taxpayers of the burden that comes when homes get sold to buyers who simply can't afford them. This transition may not always be easy, but failure to act now will ultimately prove to be much more costly in the long run.

As this important debate begins, we must bear in mind that hundreds of billions of dollars in prolonged government spending poses a direct threat to our nation's long-term fiscal prosperity, and to the short-term security of American jobs, homes and families. We can't improve our economy and create jobs in this country by bankrupting future generations.

The very essence of the American dream is to leave our children and grandchildren with more freedom, greater opportunity, and a higher standard of living than we enjoyed. Without a doubt, part of that dream is to own a home. It's a goal worth having, and is best pursued in a mortgage market where competition and choice are allowed to thrive. Legislative action is needed, and we call on our colleagues for their prompt consideration and full support.


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