There is near universal agreement on both sides of the political aisle that we need to end the two Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac whose failure is synonymous with the housing boom and bust that brought us the Great Recession.
There also is broad agreement in Washington about what should take their place: a private market funded by private capital, with a limited, explicit government role in order to keep the 30-year fixed rate mortgage widely available for qualified borrowers.
The real debate is how to move from the current system to the desired goal, and how to do so without creating an even bigger mess – and without trampling on the rights of Americans. What we don’t want is to unjustly wipe out private capital already in the mortgage market.
The basics of the housing boom and bust story are well understood. Fannie and Freddie took on large risks, were thinly capitalized, not strongly regulated, and unable to cope with the housing frenzy of the last decade.
The government took them over in 2008 and made good on the implicit guarantee to Fannie and Freddie debt holders that if trouble came, Uncle Sam would ride to the rescue. Every Fannie and Freddie debt instrument holder has been paid 100 cents on the dollar, plus all interest.
When then-Treasury Secretary Paulson announced the government take-over, he was explicit that private capital was not going to be wiped out in Fannie or Freddie, just as it wasn’t wiped out for AIG or the banks that took TARP. He said, “Market discipline is best served when shareholders bear both the risk and the reward of their investment.”
We couldn’t agree more.
The government decided to put Fannie and Freddie into conservatorship, which allows them to continue to operate, rather than receivership, which requires them to liquidate their assets. We think the government has made the right choice by keeping them in conservatorship.
Currently, private capital has little appetite for US mortgages given the recent foreclosure tsunami. Not surprisingly, over 95 percent of mortgages today include federal government guarantees.
This creates a catch-22. Everyone wants private capital to come back and replace government involvement, but, immediately terminating Fannie and Freddie risks another housing market collapse. A housing financial market with no government guarantees would mean an end to the 30-year mortgage and higher interest rates.
So what is the best path forward and where do we go from here?
The companies have been remarkably profitable recently, paying taxpayers back every penny lent, on a path to recovering the 10% they initially agreed to. Between the interest and 80 percent ownership of the companies, taxpayers will end up making quite a profit.
Yet the government is not satisfied. In 2012, the Treasury Department amended the original terms of the deal to claim 100 percent of the companies’ profit, taking away the rights of investors with the stroke of a pen.
It did this while simultaneously claiming that 20 percent of the companies remained in private control!
Why this unprecedented structure?
If the government took 100 percent ownership, then it would have to legally account for Fannie and Freddie as part of the government, including all of their debt.
Can the government have its cake and eat it too, getting away with owning 80 percent of Fannie and Freddie but claiming 100 percent of the profits? We certainly hope not. If the government were able to get away with this, why would any private capital come back to the mortgage market to fund future investment?
The government didn’t do this originally in 2008, when the Treasury Department assured private investors they still owned part of the company and were entitled to a share of the future profits. Only after the crisis had abated and the GSEs were starting to make money again, did the government change the rules of the game.
To get us back on the path towards a strong, financially sound housing market that offers affordability to American borrowers, we are calling on the government to reverse course and abide by the original terms and choices that they originally made.
First, make sure that taxpayers are paid back, in full, with interest.
Keep the 80 percent rate of ownership that the government took as the price of intervention. And honor the protection of private property rights and the principles of law, fairness, and common sense that underpin our economy -- that with risk comes reward.
If the government proceeds along this course of changing the rules in the middle of the game to wipe out private investors, private capital will never come back into the mortgage space.
We will be stuck in our current box, with way too much government intervention, increased exposure for taxpayers and no plausible path to get to the system that we know is in our nation’s best long-term interests.
The risks of sticking to this course are far too great. Taxpayers, homeowners, and investors are best served by a government that respects the rule of law.
Any housing reform package taken up by Congress must address this issue. Doing so will put us on the right path towards rebuilding our broken housing finance system.
Kenneth Blackwell is a former Mayor of Cincinnati, Secretary of State of Ohio and is a Policy Board Member of the American Civil Rights Union.