On February 7, 2008 Congress passed a hastily-concocted $152 billion stimulus package intended to give the struggling economy a shot in the arm and shore up the staggering housing market. The final package features an unnecessary and dangerous expansion of the nation’s government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, (as well as the Federal Housing Administration).
The GSEs either own or guarantee 40 percent of the nation’s $12 trillion mortgage market. They carry nearly $4.9 trillion in debt. These are the same entities that have been under investigation for improper manipulation of earnings and accounting misconduct within the last five years. The morass at Fannie Mae has not been fully mopped up, and the company is still operating under a consent order.
Both companies have been ordered to hold 30 percent more capital to compensate for the risks they now carry. Fannie Mae only recently became current with its financial filings. Freddie Mac reported that it will lose $5.5 billion over the next few years because of bad loans. Business Week reported in 2007 that both GSEs had “moved more prominently into low-documentation loans, which require little or no proof of the borrower’s income.” And, in January, 2008 Credit Suisse analysts announced that they believe Fannie and Freddie will have to “recognize an additional $16 billion in losses on loans…because of the decline in value of the mortgage-backed securities collateralized by subprime mortgages.”
Meanwhile, GSE executives have viewed the current housing crisis as the perfect opportunity to agitate for a congressional green light to sprawl into the jumbo housing market, where the companies are barred from competing. The stimulus package will authorize the GSEs to purchase mortgages valued at $729,750, which is a 75 percent increase over the current limit of $417,000. The jumbo market offers the GSEs new growth potential and the ability to keep corporate profits flowing.
Even though the expansion is slated to expire in 2009, the GSEs, which have essentially had their way with servile members of both parties for years, will have little trouble bending Congress to their will to make that increase permanent. The Seattle-Post Intelligencer editorial page nailed it on January 29, when it said that, although the stimulus package offers the “simple, quick fix,” it also includes an “extraordinarily risky venture.” Those risks fall squarely on the shoulders of the U.S. Treasury and taxpayers.
So, what are the returns on such a risky venture? The jumbo housing market serves the very wealthiest Americans. In order to qualify for a $729,000 mortgage, an individual would have to be earning between $135,000 and $234,000 annually. Not to belabor the obvious, but beneficiaries of a GSE expansion into the jumbo market (aside from profit-hungry GSE executives and shareholders, of course) would not be low- and middle-income people. In other words, the recipients of this new taxpayer-backed subsidy will be the least needy Americans; those who live in expensive homes in high cost “areas” such as New York City, San Francisco, and Washington, D.C.
Mortgage market analysts have already recognized that allowing the GSEs to purchase jumbo loans won’t yield long-term benefits to the mortgage market. One mortgage analyst told Business Week reporter Dawn Kopecki “it’s not going to solve the problem, but it’s a way for [Democrats] to get something they have wanted for a very long time.” Worse yet, there are strong indications that this initiative will drive mortgage costs up for non-jumbo, lower-income borrowers.
For years, the GSEs have fought tooth and nail against increased transparency. They have spent millions of dollars on lobbyists to scuttle congressional enactment of sensible, comprehensive, regulatory oversight. Allowing the GSEs to purchase jumbo home loans is a very bad idea, a pointless side show motivated by politics. It is a solution to a problem, to be sure, but the problem it solves has to do with the GSEs’ discomfort at having to live within boundaries that bar them from chasing big profits while offloading the risk of their adventures onto taxpayers.
Now that the GSEs and their congressional allies have passed this unprecedented expansion of the GSEs into the mortgage market, potentially 85 percent of the nation’s home mortgages will be eligible for government support or backing. This smacks of an incremental nationalization of the housing market.
Since the GSE loan increases have been rammed through in the absence of any increased GSE oversight, Congress will be flying blind. After something goes ruinously wrong and the taxpayers (and their children) are saddled with a GSE bailout, members of Congress, as usual, will be able to throw up their hands and swear they never saw it coming