Skip to Content

Deal with Fannie and Freddie now

A Financial Times’ editorial announces that “financial reform is coming to the US”.  But the Obama administration is trying to ensure that reform of the so-called “toxic twins” - the mortgage companies Fannie Mae and Freddie Mac – doesn’t come to the US anytime soon.

Fannie and Freddie were taken under federal government "conservatorship" in August 2008, in the throes of the financial crisis. The government has poured $137.5 billion into Fannie and Freddie since that time. While many banks and other organizations have repaid their TARP funds, Fannie and Freddie continue to rack up losses. And on Monday, Fannie Mae requested an additional $8.4 billion in aid, following posting a loss of $11.5 billion in the first quarter – its 11th consecutive quarter with a loss.

Democrats argue that it would be better to address federal housing policy until next year, after the mid-term elections in November. But Republicans are pressing them to include Fannie and Freddie in the current legislation on financial reform. Last week John McCain proposed an amendment that would require the government to sever ties with the companies within five years.

Fannie and Freddie continue to experience significant losses. In fact, as today's Wall Street Journal editorial argues, their losses are government-ordained policy: the administration will cover all losses by the two companies through 2012. What the Obama team and congressional Democrats don’t shout from the rooftops is that they are using Fannie and Freddie to prop up the housing market. Fannie, Freddie and the Federal Housing Administration provided guarantees or insurance for 96.5 percent of the home mortgages that originated in the first quarter, as the Wall Street Journal reported. And Fannie and Freddie are being used as vehicles to implement the administration’s anti-foreclosure program, which has led to Fannie doubling its number of loan modifications compared with the previous quarter. The still-precarious nature of the housing market, and Fannie and Freddie's out-sized role, is something that the administration is not keen to have discussed.

As the New York Times reports today, Representative Barney Frank wrote in a memo to other Democrat leaders, that the worst is behind Fannie and Freddie, and the companies have tightened lending standards:

This is an important point that has to be repeated – as Fannie and Freddie operate today, going forward, there is no loss. The losses are losses that occurred before we too the first step towards reforming them – we the Democrats – and nothing we could do today will diminish those losses.

But Fannie Mae itself announced that there was no light at the end of the tunnel:

Given our expectations regarding future losses and draws from Treasury, we do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future. As a result of these factors, there is significant uncertainty as to our long-term financial sustainability.

Fully privatizing Fannie and Freddie is the way to go. At a minimum, the role and merits of Fannie and Freddie ought to be fully debated in public.  But Democrats would seem to prefer that we look the other way while its semi-stealth housing policy continues, and that is unacceptable.

In March I wrote a post called “Fannie and Freddie: a problem, not the problem”. I still hold to that: the toxic twins are not the sole, or main, cause of the financial crisis. But, given the Democrats’ unwillingness to defend in public their support for the companies, we can also reverse it, and say “Fannie and Freddie may not be the problem, but they are still a problem”. And they are a big problem, and ought to be addressed now.

No Responses to “Deal with Fannie and Freddie now” Leave a reply ›

Leave a Reply


I'd like to hear from you. Feel free to email me with comments, suggestions, whatever. I can be reached at