Freddie (and Fannie) and the Coming Nightmare on Main Street
Government-sponsored mortgage companies are growing larger and riskier in service of social policy.
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During the financial crisis, the federal government bailed out several financial institutions. But two in particular, Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, stood out. Taxpayers shelled
out $191 billion to support them — combined, this was the largest bailout in American history — and for the past decade and a half the two institutions have been under government control.
Americans who thought the government would rein in Fannie and Freddie after their failures were sorely mistaken. The companies have only gotten larger. The Biden administration in particular has tried to make Fannie and Freddie bigger, and the result will be to make them riskier. At some point taxpayers will suffer the consequences again.
Only in government would a spectacular failure lead to a massive expansion in responsibility. In 2006, Fannie and Freddie, along with their smaller cousin Ginnie Mae, supported about
40 percent of all outstanding single-family mortgage debt. They now support over
65 percent.
Fannie and
Freddie today have $7.5 trillion in assets: an all-time high.
The massive size of these government-sponsored enterprises is not enough for some in the Biden administration. In early 2024, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, raised the maximum dollar amount of single-family mortgage loans the two companies could purchase. Now borrowers can effectively get government-backed loans up to
$1.15 million in some areas, which hardly seems necessary for Fannie and Freddie’s goal of increasing home ownership. The FHFA also seems likely to approve a Freddie request to purchase
second mortgages. The “primary goal” of the
proposal, the government says, is to create a cheaper version of “cash-out refinance” — in other words, to allow consumers to pump more borrowed money into the economy at a time of persistent inflation. Some
estimate the proposal could add another trillion dollars to consumer spending.
One reason Fannie and Freddie are expanding their footprint is that the government hopes to use the short-term profit from these activities to support other political goals. In 2022, the FHFA pushed Fannie and Freddie to
eliminate up-front fees for home buyers who had low incomes. As FHFA head Sandra Thompson
told Congress, “we were able to do this because the returns the Enterprises earned on second homes and vacation homes, investor homes, are more than enough to offset the first-time homebuyer up-front fee.” What she should have said was that the government was using taxpayer money on some mortgages in order to earn short-term cash to subsidize other groups and social programs.
The FHFA has
said that it wants to “limit egregious rent increases” at rental properties where Fannie and Freddie guarantee the underlying mortgages, even though that would increase the likelihood of defaults on those properties. It is “adding new requirements related to fair lending, fair housing” and “
Equitable Housing Finance Plans” to Fannie’s and Freddie’s mandates. Through a recent equitable-financing
plan, Fannie provides special benefits to loans in majority-black and -Latino census tracts. The FHFA is also participating in the Biden administration’s
plan to “address racial bias in home valuations,” which aims to increase home appraisals in minority areas. It has
ordered the companies to increase fees for low-risk borrowers and decrease fees for high-risk borrowers, with the goal of having the careful subsidize the rest. It also
plans to reduce the number of credit reports required for new loans.
Fannie and Freddie have been able to engage in such expansive plans in part because, besides being under government control, many of their loans are now purchased by the government. The Federal Reserve began buying mortgage-backed securities from Fannie, Freddie, and Ginnie after the financial crisis. Today the Federal Reserve holds over
$2.3 trillion in government-sponsored mortgage debt. One semigovernmental enterprise is propping up another.
All of these programs are part and parcel of this government’s policy of subsidizing housing demand while doing little or nothing to increase its supply. The Biden administration has
proposed to add to this problem by giving tens of thousands of dollars in subsidies to home buyers and sellers, the only result of which would be to further drive up prices.
In the last financial crisis, Fannie’s and Freddie’s scandalous practices became widely known. Investigators found out that Fannie put friends and family of people in Congress in cushy jobs and opened “partnership offices” in important congressional districts to hand out patronage and secure political support. Fannie’s officials got millions of dollars in reduced-rate VIP loans from institutions such as Countrywide Financial from which they purchased mortgages.
Just 15 years after the Fannie and Freddie scandals and bailouts, it is astounding that these government behemoths are growing larger and riskier. Without a significant change, Americans can look forward to reading about more scandals and bailouts in the future.
Government-sponsored mortgage companies are growing larger and riskier in service of social policy.
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bailout babies...
