By Daniel Sholler, University of Pennsylvania
At this point, most of us are tired of hearing the phrase “sub-prime mortgage crisis.” In fact, it probably makes many people downright sick. But the fact that neither of the proposed financial reform packages include language addressing the Fannie Mae and Freddie Mac debacle is troubling to both Wall Street and taxpayers alike. Two of the biggest players in the mortgage crisis—the one that had a major hand in crippling the world economy—remain on taxpayer life support and soak the nation of more and more money each day.
Perhaps the most puzzling piece of the financial reform movement is the lack of attention to Fannie and Freddie. The corporations have eluded each of the issues that have been barber shop and grocery store topics of discussion, including high bonuses, repayment of government funds, and restrictions on bottom lines. But until public outcry is loud enough to be heard on Pennsylvania Ave., do not expect much in the way of action from the Obama Administration, the House of Representatives, or the Senate.
Let’s not forget that the Treasury bought eighty percent of the companies and that the Federal Reserve has provided substantial assistance in buying toxic assets. This and the recent protection of Fannie and Freddie is just an excerpt from the long, storied history of give-and-take, push-and-pull relationship between the government and the mortgage giants.
The key points in recent history to look to in the downturn of Fannie and Freddie and the ensuing dependence on the federal government came during the Clinton and Bush administrations. Each of these administrations pushed for homeownership. These initiatives came at a high risk, especially since the majority of the push was geared towards low-income and minority citizens. Regulation requiring such risk necessitated hedging measures—in particular, higher market share—in order to provide these loans. In the years following the regulation, the crisis occurred and the rest is ugly, ugly history.
Fannie and Freddie’s short-term appeasement of shareholders placed them in a compromising situation once the crisis took hold. According to Ben Protess’ investigative report, over $1 trillion in sub-prime and high-risk mortgages were bought by the companies prior to the downturn. Now, as the economy recovers, they are still far behind. They have paid under $7 billion in funding back and continue to borrow, having used $125 billion thus far. The Obama administration and Congress are in a difficult spot, as they try to keep credit markets unclogged yet ensure that another spiral does not occur.
But what the government is failing to do is regulate Fannie and Freddy effectively enough to tame the absurd spending practices and irresponsible actions of their executives. Bonuses were exorbitant last year—in excess of $40 million—while Wall Street firms endured cutbacks on how much employees could be compensated. While most of the nation is in agreement that the financial system is imperfect and probably needs some form of regulation overhaul, leaving out certain firms due to government relationships is unfair and sets a dangerous tone for future crises.
Regulation of Fannie and Freddie has met more opposition in the Senate than anywhere else. The Obama Administration has promised reform of the companies on several occasions, but health care and Wall Street regulatory movements have put action on hold. However, it seems to be a waste of time and taxpayer money to reform Fannie and Freddie separately from other financial institutions. It may also end up being easier on these firms than Wall Street even though banks like Goldman Sachs turned record profits last year.
