Fannie Mae and Freddie Mac reform should put American taxpayers first

The Trump administration and Congress have both taken recent proactive steps to address the lingering conservatorships of government sponsored enterprises Fannie Mae and Freddie Mac. The renewed attention on them is in part due to the exit of the former Federal Housing Finance Agency Director Mel Watt and the nomination of his successor, Mark Calabria, as well as a series of Senate Banking Committee hearings on these entities.

Structural reform of the government sponsored enterprises is certainly long overdue. It must first and foremost protect taxpayers. It should bring full transparency, oversight, and accountability to the activities of Fannie Mae and Freddie Mac, end their expansionary and intrusive behavior, and restore free market principles to the secondary housing market.

{mosads}Fannie Mae and Freddie Mac, which were placed into what was supposed to be temporary conservatorships during the 2008 financial crisis, have remained under government control for more than a decade. During this time, these entities have received more than $190 billion in taxpayer support and currently finance nearly half of all first lien United States mortgages. Furthermore, they have $5.4 trillion in mortgage obligations.

Under government conservatorship, one would have expected rigorous oversight of the activities of Fannie Mae and Freddie Mac, given their prominent role in the housing market collapse that led to the Great Recession. However, Federal Housing Finance Agency leadership under Watt was lackadaisical to say the least, and the government sponsored enterprises embarked on an ambitious and largely inscrutable agenda that has ended up unfairly displacing private sector market participants.

Fannie Mae and Freddie Mac sought to extend credit to riskier borrowers, compete directly with the private sector, and conduct business directly with consumers, which is quite inappropriate given that their legislative charters dictate that they are confined to their activities to the secondary mortgage market. Their executives have given themselves exorbitant salaries and inspector general reports found extravagant expenditures and mismanagement related to the lavish new Fannie Mae building.

In 2016, the government sponsored enterprises launched their single family rental pilot programs without a request for information, which would have given market participants the chance to provide feedback on the necessity and challenges associated with the new activities. Two years later, after wasting millions of public dollars, Fannie Mae and Freddie Mac belatedly recognized that the private sector was already serving this area well and had no trouble backing the purchasing of such homes without government intervention, so they shuttered the program. As the regulator of these entities, the Federal Housing Finance Agency should have put a stop to this mission creep before it even launched off the ground.

In addition to the unnecessary single family rental programs, these entities have spent considerable time and money on developing and implementing other pilot programs that would displace private sector functions and expand their reach well beyond their secondary market mission, from financing select nonbank mortgage servicing rights to introducing products that compete directly against private mortgage insurers. The pilot programs bypass free market competition by giving Fannie Mae and Freddie Mac the power to pick winners and losers in the housing finance system. Not only are the programs outside the intended scope for their legislative charters, they reek of crony capitalism.

The lack of transparency does not stop with these pilot programs. The public has very limited insight into other government housing finance operations, including setting of guarantee fees, spending on lobbying, and the conservator capital framework. These opaque operations, along with mission overreach, means that taxpayers are bound to shoulder a greater burden of risk for activities over which they have no oversight or control. Rather than working to shrink their footprints, constrain their activities to those under their charters, and reduce taxpayer risk, their regulator has allowed these entities to dictate the industry agenda.

The Trump administration, members of Congress from both sides of the aisle, and the new Federal Housing Finance Agency director must act to reform these two structurally flawed government sponsored enterprises. As an initial step before a final plan is adopted, the new programs and pilots that expand the duopolistic control of Fannie Mae and Freddie Mac within the mortgage market and increase their massive footprints to the detriment of taxpayers should be terminated, and they must be made completely transparent and accountable for all their expenditures.

Tom Schatz is the president of Citizens Against Government Waste.