Fannie Mae and Freddie Mac do not make loans directly to home buyers. They buy loans from banks and sell them to investors as securities. In the first quarter of 2010, together with the Federal Housing Administration, Fannie and Freddie (actually you the taxpayer) guaranteed 96.5% of all new home loans.
Fannie Mae and Freddie Mac are government-sponsored corporations that own or guarantee more than one half of the nation’s $11 trillion in mortgages. They have issued $1.6 trillion in corporate debt. All of this is outside the federal government budget and off its balance sheet.
With the implicit guarantee of backing by the federal government, Fan and Fred are able to borrow money at lower rates than their private competitors in the secondary mortgage market, crush their private competitors, and achieve a dominant market share.
So far taxpayers have paid $145.9 billion to bail out Fan and Fred, the largest bailout of all. The Congressional Budget Office estimates they will cost taxpayers $290 billion in 2010, almost $1,000 for every man, woman and child in the U.S.
On Christmas Eve (!), December 24, 2009, the Obama administration announced it would provide unlimited funds to cover any losses of Fannie Mae and Freddie Mac through 2012, the rest of President Obama’s first term.
This “allows the government to exceed the [previous] $400 billion cap on emergency aid without seeking permission from … Congress.” (Washington Post, A01, December 25, 2009)
Rep. Scott Garrett (R-NJ) called the unlimited guarantee “a continued bailout of failed entities that need to be privatized to protect the taxpayer.”
"Republicans ... introduced a measure during the financial-overhaul debate [May 2010] that detailed how to wind down the companies, but the amendment ... was defeated." (Wall Street Journal, p. A2, May 24, 2010)
Fannie Mae and Freddie Mac were major causes of the housing bubble and the current recession. They made “mortgage investments … to less-than-worthy borrowers.” Their risky “Alt-A” loans to borrowers with little documentation of income or assets accounted for 9% of Fannie’s loan guarantees and nearly 40% of its credit losses in the fourth quarter of 2009.
The former head of the federal regulator of the two companies testified to a Congressional panel in April 2010 that the collapse of the companies reflected a “deeply rooted … culture of arrogance and greed.” (Wall Street Journal, April 10, 2010)
Franklin Raines, an Obama financial advisor, received $90 million in bonuses while running Fannie Mae.
Henry M. Paulson, Jr. writes that President George W. Bush “had a deep disdain for entities like Fannie and Freddie, which he saw as part of a permanent Washington elite … with former government officials and lobbyists cycling through their ranks endlessly while the companies minted money, thanks, in effect to a federal entitlement.”
Senator Chris Dodd (D-CT), chair of the Senate Finance Committee which oversees Fannie and Freddie, received more campaign contributions from the two organizations than any other lawmaker, according to the Center for Responsive Politics.
The Obama administration has refused to account for the Fan and Fred debt it has guaranteed in the official federal budget. (See "Fiscal responsibility"
Rep. Scott Garrett (R-NJ) has sponsored the Accurate Accounting of Fannie Mae and Freddie Mac Act “to require that taxpayers receive an honest accounting of their exposure to the failed housing behemoths.” (Wall Street Journal, A18, February 23, 2010).
The same investment policies that led to the housing bubble and crash continue in effect at Fan and Fred. The government should get out of the mortgage business.
Newt Gingrich, in his book To Save America,
p 151, puts it this way:
"Fannie Mae and Freddie Mac ... need to be replaced with smaller, private companies operating without government guarantees, whose leaders focus on making a profit, not manipulating politicians."