We Need Protection From Fannie and Freddie

John Berlau, in his article for Newsmax, discusses the future of Fannie Mae and Freddie Mac and the bill that will prevent their bail out.

Wish baseball great Yogi Berra were still here – upon the release of Freddie Mac’s new quarterly report showing a sudden Q3 loss – so he could offer his famous Yogism “it’s déjà vu all over again.”

After seemingly smooth sailing under which Freddie and its sister Fannie Mae turned profits over the last couple years, this net loss of $475 million raises the specter of yet another government bailout.

Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that many observers — from American Enterprise Institute scholar Peter Wallison to New York Times business columnist Gretchen Morgenson — say were the main cause of the financial crisis still face no requirement for any type of capital cushion.

A coalition letter that my organization, the Competitive Enterprise Institute (CEI) helped put together just weeks ago warned that this lack of capital leave Fannie and Freddie vulnerable to sudden changes in the housing market Fannie and Freddie were chartered by Congress around 45 years ago as companies with private shareholders but lines of credit with the government.

In 2008, Fannie and Freddie were taken into conservatorship by the federal government to prevent them from collapsing.

Pursuant to the Obama administration’s 2012 “Third Amendment” to the conservatorship, all of Fannie and Freddie’s net profits have been swept back into government coffers, leaving them with virtually no capital.

This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedure Act to unconstitutionally taking property without “just compensation,” a violation of the “Takings Clause” of the Fifth Amendment.

Richard Epstein — New York University law professor who has championed property rights of everyone from farming and ranching victims of environmental overkill to urban homeowners facing condemnation due to politicians’ declaration of “blight”—calls the Third Amendment a “giant heist.”

But as Freddie’s loss shows in addition to shareholders, the Third Amendment is also terrible for taxpayers.

The profit sweep is leaving Fannie and Freddie with very little capital reserves, and instead the money is being diverted for general government spending and to political housing “advocates” through the Affordable Housing Trust Fund.

This stripping of their capital furthers the chance for more taxpayer bailouts of Fannie and Freddie should something go awry with the housing market again.

Fortunately, there is legislation that will at least put the brakes on this sweep of cash and help prevent another bailout of Fannie and Freddie: H.R. 1673, the “Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act of 2015,” introduced by Rep. Marsha Blackburn, R-Tenn.

The bill create a reserve fund using profits generated by the GSEs. If Fannie and Freddie experienced significant losses, they could draw down this reserve fund, rather than going back to the Treasury, i.e., taxpayers, for additional resources. Once the government’s conservatorship of Fannie and Freddie ends, the reserve fund would dissolve.

Leaders of 15 Center-Right groups recently signed a letter, coordinated by CEI and the National Taxpayers Union, urging Congress to “pass H.R. 1673 as a standalone bill or as part of other legislation.”

In the letter, we conclude that H.R. 1673 is only a “first step” to comprehensive reform of Fannie and Freddie. The bill, we write, “highlights the need for Congress to reduce dramatically the role of government in the housing finance system. In particular, Fannie and Freddie’s government support, implicit and explicit, should be phased out.”

As CEI founder Fred Smith urged Congress in testimony in 2000 — to mostly deaf ears — policymakers should “develop a divestiture or breakup plan for Fannie and Freddie.” And in such a plan, as in traditional bankruptcies, the rights of both taxpayers and private shareholders must be respected.

Originally posted at Newmax.