I’ve learned a lot about Fannie Mae and Freddie Mac in the past quarter. I’ve learned that their execs are scandalously overcompenstated. I’ve learned that those same execs were incented almost wholly based on market share rather than profitability. I’ve learned about their political activities; that they’ve given $2 million to Congressional incumbents in the last two cycles, and that only recently they paid big fines because such activities had gotten out of control. I’ve learned about the $6.3 billion accounting restatement that led to Franklin Raines’ departure.
I’ve learned a lot about the lack of accountability of the two GSEs. That the CEOsof FM2, both of whom earned 8-figure bonuses last year, are apparently above firing. I’ve learned that even though their former regulator was spending more than $250k per person per year, it didn’t have the resources to stand up to the favor the GSEs had curried in Congress, even after it found that F&F “willfully manipulated” earnings. I’ve learned that the old regulator thought it was doing the best it could; that in fact in 2007 it hit 33 of its 34 performance benchmarks. I’ve learned that the new regulator will be run by the same guy as the old one; that he now will report to a board that is composed of the secretaries of both HUD and Treasury; and that he will supposedly have a say in CEO compensation. (I haven’t learned how the F&F corporate boards fit in here, as they are fiduciaries only to the shareholders).
I’ve learned some history, too. How Fannie was started as part of FDR’s new deal in 1938; how LBJ decoupled it from the nation’s balance sheet as part of the architecture of the Great Society; how Freddie was started as a competitor to Fannie in the secondary market for mortgages. (What I’ve not yet learned was who had the brilliant idea to take the two entitities public, so that a small group of shareholders and management team members could profit handsomely by overcharging for the GSEs’ government guarantee, precisely until it turned out they were undercharging for it).
With all my learning, understanding is scarce, especially on this central question: whether the existence of the GSEs makes a rip of a difference in the advancement of their putative mission– providing affordable housing for U.S. citizens. Why is it, for example, that Canada has almost exactly the same homeownership rate as the U.S., but with no GSE equivalents and much, much more stringent down payment requirements?
Put simply: how do we know that F&F are working as intended? Shouldn’t somebody maybe look into this? I’m reminded of what Pat Buchanan recently said about convservatism: that it started as a cause, became a movement, then a business, then a racket. Insert “affordable housing” for Buchanan’s conservatism.
To borrow a George Will-ism (apparently I’m in an uncharacteristically righty mood today): that pedal on the organ has been severely overworked.
Maybe more importantly, let’s assume that the existence of the GSEs really does have a favorable impact on mortage rates (what little data I’ve seen on this is pretty inconclusive) and therefore the breadth of homeownership. I guess my question then is, so what? At what cost? Have we really voted as a society to bear the costs and unintended consequences of Fannie and Freddie’s support of homeownership for the the marginal borrower, versus, say, a massive government loan guarantee program for vocational education? Or–here’s whopper of an idea–some level of national debt reduction?
Our continued propping up of FM2 is yet another demonstration of how American society continues to channel Wimpy from the old Popeye cartoons: we’re only too glad to promise payment on Tuesday for a hamburger today. It would be nice to at least know that the burger we’re being sold has some meat in it.