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Congress Probes Fannie Mae, Freddie Mac

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Congress Probes Fannie Mae, Freddie Mac

Dispute over the Cause of the Credit Crisis

Washington,
D.C., December 9, 2008—Today, the House Oversight and Government Reform Committee
is finally holding a hearing on the failures of the government-sponsored
housing enterprises Fannie Mae and Freddie Mac. John
Berlau
, Director of the Competitive Enterprise Institute’s
Center for Entrepreneurship, applauds the committee for grilling former Fannie
and Freddie executives, but he disputes Chairman Henry Waxman's assertions that
the GSEs were not a “catalyst” of the mortgage crisis and were simply “following
the market.” 

“Fannie and Freddie were indeed among the biggest catalysts
of the crisis, as banks knew they had a willing buyer for many questionable mortgages,”
Berlau said. “They guaranteed or invested in $717 billion of subprime
or near-subprime Alt-A mortgages, according to the New York Times. Even more importantly, through their market power
generated by their quasi-government status, they lowered standards
even for prime or ‘conforming’ mortgages. Without the existence of Fannie and
Freddie as buyers of lower-quality mortgages, many of the loans that have
cause so much of the current turmoil would not have been made.”

Below is an excerpt on Fannie and Freddie from a new article
by Berlau in Stocks, Futures & Options magazine looking at the
causes of the credit crisis. Read the full article here.

Rushing to Regulate: Which Way Is Wise?

The mortgage giants Fannie Mae and
Freddie Mac had the peculiar designation as government-sponsored enterprises.
Although owned by private shareholders since Fannie’s reorganization and
Freddie’s creation approximately 40 years ago, they were chartered by Congress
and maintained special privileges from the government. They were exempt from
state and local taxes and, unlike every other public company, they were exempt
from SEC regulation. Also, they each had a $2 billion line of credit with the
United States Treasury Department.

Critics, including my boss,
Competitive Enterprise Institute President Fred L. Smith, had long warned that
this hybrid structure—with “privatization of profits” and “socialization of
losses” through implied government guarantees—held dangers. In 2000, Smith
testified to the House Financial Service Committee that “no one is quite sure
how these entities should be evaluated or held accountable.” On the line of
credit with the government, he argued that “as long as the pipeline is there…it
is very expandable” and added that “it is only $2 billion today. It could be
$200 billion tomorrow.” Eight years later, it turns out he may have
underestimated the amount Fannie and Freddie may cost taxpayers after the
government took them over.

During the past 15 years, Fannie’s
and Freddie’s portfolios were allowed to grow to approximately $6 trillion in
mortgages. Fannie and Freddie became ready buyers for mortgages that may not
have been issued in the absence of their existence. By the end of 2007, they
had guaranteed or invested in $717 billion of subprime or near-subprime Alt-A
mortgages, according to the New York
Times.

But even aside from that, they had
lowered the standards for a prime mortgage. A 2004 article in the Fannie Mae
publication Housing Matters notes,
“Lenders now classify some mortgage products that were traditionally B or C as
A- because Fannie Mae and Freddie Mac are willing to purchase these mortgages.”

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public policy group dedicated to the principles of free enterprise and limited
government.  For more information about
CEI, please visit our website at www.cei.org.