It’s been 10 years since the Wall Street financial crisis launched the Great Recession and the government took over Fannie Mae and Freddie Mac. But while the economy has recovered and is experiencing rejuvenated growth, and Fannie and Freddie have put back into government coffers nearly $100 billion more than they received in assistance, their conservatorship continues. To promote stability in the housing market and reduce the risk of additional taxpayer bailouts, we must end the federal takeover of these stockholder-owned enterprises.
The conservatorship of Fannie and Freddie was never supposed to be permanent. The U.S. housing market, accounting for nearly 20% of the gross domestic product, was imploding 10 years ago as prices plunged by more than 50% in some areas and homeowners defaulted on their loans in record numbers. To help stem the tide and calm the fears of global investors, the Treasury Department and newly created Federal Housing Finance Agency took control of the government-sponsored enterprises. As then-Treasury Secretary Henry Paulson put it, “policymakers must view this next period as a ‘time out’ where we have stabilized the GSEs while we decide their future role and structure.”
Ten years on, the enterprises are still in timeout. But unlike other institutions that received government aid during the crisis, the GSEs can never repay their debt to the government. According to the 2012 modifications of the original financial aid agreements, all Fannie and Freddie earnings will be sent to the Treasury in perpetuity. After receiving $187 billion in aid from the U.S. Treasury from 2008 to 2012, returning to profitability and stabilizing the broader mortgage market, they have cumulatively repaid more than $280 billion and counting. As one architect of the 2012 modification said, “They can never escape.”
While the federal leviathan is loath to depart with this roughly $25 billion annual payday, the arrangement is nevertheless a bad deal for taxpayers. The quarterly sweep of the GSEs’ earnings forbids them from ever rebuilding their capital, which not only prevents them from being safely released from conservatorship, but also leaves them woefully unprepared for future crises.
The GSEs now support 60% of the mortgage and housing market while guaranteeing more than $5.4 trillion in global mortgage obligations. They do all this with just $6 billion in real capital. While they do have a $180 billion credit line from Treasury, their paltry capital levels leave them, the housing market, and taxpayers vulnerable to future market failures. If the GSEs were a bank, they would be shut down for being critically undercapitalized. Of course, American taxpayers would be on the hook for that as well.
The United States has laws and rules that enable our capital markets to function properly. When Treasury and government agencies ignore those laws and trample on the rights of shareholders, we are no better than a banana republic given to arbitrary government expropriations.
The impact of the Great Recession was disastrous, but a decade is long enough. While certain structural reforms are needed Fannie and Freddie have more than repaid their debts and should be permitted to recapitalize and be released from government control. Congress will need to address the structural issues, but Treasury and the FHFA have the power to officially release the GSEs from their temporary “timeout,” and the 10-year mark is a good place to stop the clock.