While I do agree that Congress should work hard to avoid action that would bring undue harm to investors, it is also it is important to note that without Federal assistance, shares in these enterprises likely would have lost all value.
- Dianne Feinstein, United States Senator
Now look at Richard Epstein's response to this argument:
On this point, Senator Bob Corker thinks that Fannie and Freddie and their shareholders have no beef at all stating, "While I'm always glad when taxpayers see a return on investment, we can't forget that Fannie and Freddie wouldn't be earning one penny today without the government guaranteeing their transactions."
To this argument there are two replies. The first is that Fannie and Freddie may never had gotten into the mess if the United States had not insisted that it make high-risk loans to low- and moderate-income housing, first under the Housing and Community Development Act of 1992 (HCDA), as amended in 2007. In 1992, 30 percent of GSE loans were devoted to these programs. By 2007, that target had been raised to 55 percent. The conditions attached to the 1992 Act could be satisfied only in some financial Nirvana, for the legislation announced that Freddie and Freddie "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return . . . ." No one can do both simultaneously. It is a financial impossibility to increase the number of high-risk loans, without courting disaster in the event of a market downturn. Yet nothing in the Corker calculations takes this heavy obligation into account. Instead, he focuses exclusively on the government's implicit guarantee of Fannie and Freddie, later made explicit, which kept them afloat.
The deep danger in his approach is that it makes it impossible to determine the relationship between the heavy costs under the HCDA against the implicit government guarantee. But it is assuredly a wrong answer to count the implicit guarantee while ignoring the correlative duties that Congress imposed. In my view, a first-best world removes both of these requirements so that market-based housing becomes the norm. It might be said in response that without government intervention, the number of Americans that will own their own homes will decline. But that proposition is not the same as saying that the number of Americans with a roof over their head will decline. Instead it will lead to an increase in rental housing, which reduces radically the risk of major financial dislocations. Landlords run businesses and in general will not engage in the kind of borrowing and leasing that are likely to cause a financial disaster.
The second response in this instance is that the 2008 agreement is water over the dam. Before that agreement was entered into, the government had the option under HERA for the FHFA to close down Fannie and Freddie. But legal consequences follow once it takes the decision to go the other route. It is critical to remember that the shares of both companies traded in the market after the 2008 date marking the onset of the conservatorship, and the share prices in those transactions rested on the assumption that the Fannie and Freddie could not be stripped of future profits by government fiat. One cannot defend the Third Amendment in 2012 by announcing after the fact--and following and in the midst of active trading--that the 2008 SPSPA was, well, a mistake. That brazen approach gives the government two bites at the apple, and a free option to switch from one system to another with the benefit of hindsight after events have played themselves out. One might as well let gamblers place their bets in a horse race after the race has been run, and not before.
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