The Sneaky Path We Took To A Socialist Mortgage Market
Jeffrey Dorfman
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I use economic insight to analyze issues and critique policy.
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Back in September 2008, two government sponsored entities commonly known as Fannie Mae and Freddie Mac were placed under government conservatorship. These two quasi-governmental agencies provided much of the liquidity in the U.S. mortgage market by borrowing money at low rates thanks to their implicit government guarantee, and then using those funds to purchase and securitize mortgages. But with the real estate bubble deflating rapidly, they were broke and needed government help. Or did they?
A strong case can be made that Fannie and Freddie should never have existed in the first place. If the government was taking much of the risk by guaranteeing their bonds, why were Fannie’s and Freddie’s executives and shareholders allowed to share the profits? However, the answer to this question should have been to revoke their implicit government backing, not to make them a full-fledged arm of the government.
A new report by some investors who would like to see some return on their shares in Fannie Mae shows that the government used some highly questionable accounting tactics in order to make it appear that Fannie Mae needed a bailout Their analysis shows that Fannie actually had enough cash reserves to have made it through the recession; in fact, they show that Fannie actually generated positive net cash income every quarter throughout the mortgage market meltdown.
Rather, the losses on the accounting statements that led to the government takeover were all non-cash items: large increases in reserves for future loan losses and a removal of a deferred tax credit asset (the value of having past losses to use against future profits and thereby avoid taxes). In simple terms, the federal government forced Fannie’s accountants to show a large loss on paper and took them over on that basis.
Oddly, the federal takeover of Fannie and Freddie appears to have been done for one reason, while they have continued under federal conservatorship for an opposite one. The Bush administration wanted a free-market mortgage market and saw the takeover as the first step toward eliminating Fannie and Freddie.
In contrast, the Obama administration sees Fannie and Freddie as both a source of revenue for the government to spend on pet programs and as a tool through which the government can wield social policy. Since taking over the two mortgage giants, the federal government appears to have made about $40 billion in profits, money that goes into the Treasury and can be used to increase spending without raising either taxes or the deficit. Just as importantly, Fannie and Freddie can be used to push social policies such as steering more mortgages to poor or minority neighborhoods, accepting low down payment loans, etc.
Naturally, as a libertarian, I oppose a socialized mortgage market which is what we are now more or less running. However, one can make a case for either a free market or a nationalized system of providing liquidity to the mortgage market. What you should not do is commit fraud to implement your preferred option.
The federal government appears to have done two fraudulent things on the way to our current situation. First, they used false pretenses to take over Fannie and Freddie. Second, they pretended they were only temporarily providing financial stability. While the government took an ownership stake in return for its “bailout” (a trick it may have learned from Warren Buffett) , they allowed private shareholders to remain and have even sold some of the government’s shares on multiple occasions. However, unlike a truly private company, all profits of Fannie and Freddie are still being seized by the government for reasons which are unclear and possibly illegal.
Given that the government did not simply declare Fannie and Freddie defunct, but allowed private shareholders some hope (and even sold them shares), it seems the government created an expectation of future return to those shareholders. Yet, several years past the date when the government was paid back, it continues to deposit all profits into the Treasury, leaving investors high and dry. At least the way our government does it, socialism pays pretty well.
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