- The Washington Times - Friday, June 23, 2000

An ongoing fight over Fannie Mae seems to turn on envy. The most vociferous opponents of the federally char-

tered company are powerful banking interests that now feel threatened by Fannie's resounding success. What better motive might they have than envy of Fannie Mae's growth, of its market share, and of its profits?

The chief opponents of Fannie Mae and it is smaller financial cousin, Freddie Mac, are those who stand to profit if regulations are tightened on those government sponsored entites (GSEs). The opposition group is led by FM Watch, a coalition of banks, private mortgage lenders. They argue that although Fannie Mae was chartered by the government as a private corporation several decades ago it still enjoys a special relationship with the government. That relationship gives Fannie and Freddie a special competitive advantage in raising capital, making loans, and hence in making a profit.

Such criticism overlooks the good Fannie Mae and Freddie Mac have done for average Americans. These two GSEs were conceived as a means of making homeownership more available by using private funds to ensure liquidity in the secondary mortgage market.

The idea has succeeded splendidly. Fannie Mae and Freddie Mac currently have total assets of $1 trillion and own mortgages amounting to 17 percent of the entire market. They have thus been able to make mortgages more available to millions of Americans. Consequently, more people are becoming homeowners without overwhelming the family budget. Overall mortgage debt has grown, but much more slowly pace than other household debt. Mortgage debt between 1995 and 1998 actually declined, as a share of household debt, according to Federal Reserve Bulletin statistics in January 2000.

America gets more than a general increase in homeownership. They also get lower rates on home mortgages, for starters. Fannie Mae's purchase of mortgages and mortgage-backed securities reduces the amount a borrower has to pay the savings over the course of a 30-year loan could amount to at least $10,000-$27,000, a 1999 econometric analysis by First Manhattan Consulting Group concluded.

These GSEs also stabilize home loans, no matter what temporary or regional financial crisis the country may be going through. For example, in the 1998 credit crunch, Fannie Mae's 19 percent increased purchases resulted in 33-basis-points lower, not higher, mortgage rates. This stability means a more secure source of mortgage funding Fannie Mae's credit loss rate has for a decade been averaging 5 basis points compared to banks' credit loss rate of around 86 basis points. And in the past several years, as Fannie Mae has been growing, its credit losses have been reduced by 70 percent.

Thanks to Fannie and Freddie, America's housing stock is getting better as well as more plentiful. By increasing homeownership, Fannie Mae has helped funnel more resources into housing under $252,700. In neighborhoods with run-down buildings, this has meant vast improvements. In deed, the urban renewal effect has lifted neighborhoods nearly everywhere. They have transformed homeownership among minorities from a dream to reality.

Fannie Mae and Freddie Mac have not had to take on excessive debt themselves. Fannie and Freddie's debt barely reached 24 percent of publicly held debt (around $3.7 trillion) and less than 16 percent of all public debt (around $5.65 trillion), according to the latest U.S. Treasury Department figures (see www.publicdebt.treas.gov/opd/ opdpenny.htm). Furthermore, Fannie Mae debt is not public debt at all, and it is not like unsecured consumer debt; the mortgage debt facilitated by Fanny Mae is secured by the America's housing infrastructure.

Congress, meanwhile, has kept Fannie Mae and other GSE tightly tethered to their original mission. Fannie's operations are completely open to public scrutiny and subject to rigorous supervision and examination by the Office of Federal Housing Enterprise Oversight (OFHEO). Furthermore, a 1992 law requires that Fannie Mae operate under a stringent risk-based capital standard a capital test that few banks or thrifts in the country could survive, as one 1999 study concluded.

So what of the special treatment Fannie Mae and Freddie Mac receive? They are both exempt from state and local income taxes and their debt securities receive favorable regulatory treatement. For example, they are eligible for Federal Reserve Board open market transactions, and they are also eligible to use the federal government's deposits of tax revenues as collateral. They are granted these benefits so they can afford to meet their original mandated mission.

This success has meant financial markets regard their securities as extremely sound and accord them better rates than other corporations. A 1996 Congressional Budget Office study estimated the value of those benefits at $6.5 billion.

That subsidy now is the rationale used by Fannie Mae's opponents to press for an increased regulatory burden on both Fannie and Freddie. They complain that a portion of that $6.5 billion winds up in the pockets of Fannie Mae shareholders and management. In light of the little cost and high benefits, these complaints sound suspiciously as if those corporate banking interests covet the money made by Fannie and Freddie.

This is, to say the least, un-public-minded of them.

Now, what would the cost be if the subsidy were eliminated, if Fannie Mae were constrained through an onerous regulatory burden.

You could measure that cost in higher mortgage rates, an increase in volatility and instability in the mortgage market, possibly even a sudden, sharp reduction in housing construction, with the serious economic ripple effects that would bring.

Even if the implicit subsidy were part of the Federal budget, there are surely other, safer ways to reduce government spending by such a tiny amount.

Fannie Mae and Freddie Mac succeeded enormously. They are an example of a government idea that has worked. And is still working well.

And if it ain't broke, why try to fix it?



Gregory Fossedal is chairman of the Alexis de Tocqueville Institution in Arlington.

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