By Congressman Joe Pitts
It’s been over five years since the investment firm Bear Stearns spectacularly failed, foreshadowing the coming failure of multiple Wall Street firms in the fall of 2008. The epicenter of the financial collapse was an overinflated housing market. The biggest players in that market were two government-sponsored enterprises, Fannie Mae and Freddie Mac.
As Fannie and Freddie collapsed in the fall of 2008, the federal government began bailing them out. Public money spent on the two mortgage giants would total $189 billion, more than the next three bailout recipients combined. While some of that has been paid back, they still owe the taxpayer some $65 billion.
I voted against the Troubled Asset Relief Program, the legislation that created the bailout fund. At the time, I thought that there were better ways to alleviate the crisis that didn’t take advantage of taxpayers.
Fannie Mae was founded during the Great Depression as part of Roosevelt’s New Deal. When Fannie Mae was partially privatized, the government started Freddie Mac to provide competition. Starting under the Clinton administration, executive pay at these institutions became tied to earnings growth.
In the private sector, there is little problem with tying pay to growth of a company. Ultimately, the executive is beholden to shareholders. If a company fails, the damage is limited to those investors. With Fannie and Freddie, there was always an implicit guarantee that the federal government would step in if they failed. This allowed executives to take risks that those in the private sector may have avoided.
Fannie and Freddie also had a well-intentioned but dangerous goal to support affordable housing. The institutions were the largest purchasers of the risky mortgages that lost all value when the housing market collapsed. Some 70 percent of subprime and other low-quality mortgages were owned by Fannie and Freddie alone. They were taking these risks in large part to please Congressmen on Capitol Hill.
Fannie and Freddie’s defenders, like former Financial Services Committee Chairman Barney Frank (D-MA), insisted that they were never at risk of going under. At this same time, his longtime boyfriend was a top official at Fannie Mae. He also took over $40,000 in campaign contributions from the lenders during his time in Congress.
Frank was hardly the only enabler, even many Republicans took campaign donations from Fannie and Freddie and fought efforts to rein in their spending binge. In 2005, I voted for a series of amendments that would have reduced the risk to taxpayers. Each of these amendments was overwhelmingly defeated and we were labeled as pessimists for doubting the fiscal strength of Fannie and Freddie.
Just three years later, the worst-case scenarios all came true. Now, even Barney Frank has called for the two to be abolished.
This week, the House Financial Services Committee advanced legislation to do just that. The Protecting American Taxpayers and Homeowners Act, introduced by Rep. Scott Garrett (R-NJ), would end the taxpayer-funded bailout of Fannie and Freddie.
The bill calls for the two entities to cease operations within five years making sure that taxpayers are never again liable for the bad decisions of wealthy mortgage executives. The legislation also gives consumers more choice so that they can determine what kind of mortgage best suits their needs.
Opponents of reform have been making outlandish claims, even maintaining that the ending Fannie and Freddie could mean the end of 30-year fixed rate mortgages. The truth is that Fannie and Freddie aren’t lenders. They purchase and repackage loans. They don’t originate them.
The PATH Act would not end all government support of lending. The Federal Housing Authority would continue to back some loans for first time buyers and low income Americans, the kind of people who need help.
Fannie and Freddie executives made a lot of money in the good times. None of them were charged with crimes or personally liable for decisions that ultimately cost the taxpayers $189 billion. It’s time to put a stop to the biggest bailout of all time and make sure it never happens again. We can do that by ending Fannie and Freddie.