How did Fannie Mae and Freddie Mac wind up costing U.S. taxpayers more than $150 billion so far?
The Federal National Mortgage Association was established by the government in 1938 as a federal agency and was chartered by Congress as a private company with public shareholders in 1968.
Two years later, the Federal Home Loan Corp. was chartered by Congress to compete with Fannie and help ensure a steady supply of mortgage capital.
While the two companies grew to own, manage or guaranty more than $5 trillion in mortgages, the collapse of the housing market that started in 2006 eventually led to the government takeover of both government-sponsored enterprises.
So far, $156 billion has been requested from the U.S. Department of the Treasury to keep the two secondary lenders afloat.
The National Public Radio show Planet Money took a stab at explaining how Fannie and Freddie got to this point in episode No. 262, Fannie and Freddie’s Rise and Fall. A podcast of the show is available for download at iTunes.
According to Planet Money, Fannie was the creation of the Roosevelt administration during the Great Depression, while it was privatized in 1968 by the Johnson administration as a means to cut government costs. But because investors believed — and the two GSEs secretly promoted — that the U.S. Government would ultimately guarantee their mortgage-backed securities, the companies were able to finance securitizations at lower costs than financial institutions that were not implicitly linked to the government.
But instead of benefiting U.S. borrowers, the cost savings was passed onto employees and shareholders of the two companies. In order to ensure that this advantage continued, Fannie and Freddie assembled two of the most powerful lobbying teams the country has ever seen. These top-notch D.C. players kept the pressure up on Congress to keep regulation and capital requirements to a minimum.
The culture of the lobbying team was “us against them,” according to Fannie’s former chief lobbyist. Loyalty was established with employees by promoting the affordable home ownership that the two firms provided. Congress was pressured by being made aware of how many loans in their districts was guaranteed by the GSEs.
Ultimately, according to one guest on the show, after all is said and done — Fannie and Freddie did nothing to raise U.S. homeownership rates higher than other countries that had no similar institutions. On top of that, taxpayers are on the hook for more than $150 million and rising.
