Americans for Tax Reform joined a group of free-market groups and signed a coalition letter encouraging legislators to prioritize reforming Fannie Mae and Freddie Mac this Congress. Reforming these Government Sponsored Enterprises and their conservatorship will help protect American taxpayers from continuing to remain on the hook and bailing them out again in the event of another financial market emergency.
Fannie Mae and Freddie Mac are America’s two largest home mortgage companies. While they do not originate any mortgages, both provide liquidity to the mortgage market by purchasing mortgages from lenders. Fannie and Freddie either hold the mortgages in their portfolio or securitize the loans into pools called mortgage-backed securities that are sold to investors.
The two GSEs wield an effective duopoly over the secondary mortgage market and currently guarantee almost $7 trillion in mortgage-related debt. Fannie Mae and Freddie Mac were congressionally chartered private companies established to encourage homeownership, but the actions taken in the wake of the housing crisis effectively put the companies under government control, known as conservatorship.
During the 2008 financial crisis, some of the mortgages bought by the GSE’s started to fail. Homebuyers were unable to meet their mortgage payments, jeopardizing the solvency of Fannie and Freddie’s mortgage portfolios. As a result, the Housing and Economic Recovery Act of 2008 placed both Fannie Mae and Freddie Mac into government conservatorship on September 6, 2008, under the newly created Federal Housing and Finance Agency. Because the conservatorship arrangement implies that the government now guarantees the loans, the American taxpayers have become the backstop of a multi-trillion-dollar loan portfolio. When Fannie and Freddie were nearing insolvency in 2008, they borrowed over $191.4 billion from the U.S. Treasury. If the housing market declines again, Fannie and Freddie can borrow the remaining amount from the $254 billion Treasury credit line left over from 2008.
Legislators and regulators did not intend for the conservatorship to be perpetual. It was supposed to be a short-term emergency measure to keep GSEs solvent and prevent further escalating the financial crisis. In 2008, FHFA Director James B. Lockhart stated that Fannie and Freddie would only be under conservatorship until they were stabilized. Similarly, the former Office of Management and Budget Director Jim Nussle considered the arrangement to be temporary.
However, Fannie Mae and Freddie Mac are entering their 13th year under federal government control. Fannie Mae and Freddie Mac have increased their loan portfolio to levels 33% higher than pre-crisis. After a decade of recovering home prices and economic expansion, the need for GSE’s to remain in conservatorship has long passed.
It is long overdue for Congress to prioritize ending the GSEs conservatorship and protect taxpayers from further remaining as a federal backstop. Americans for Tax Reform and the undersigned organizations strongly urge Congress to prioritize comprehensive housing finance reform in the 117th Congress.
Click here to review the letter.