July 11, 2005
By Edwin J. Feulner, Ph.D.
Many lawmakers want to fix Fannie Mae and Freddie Mac, the two
huge government-sponsored enterprises (GSEs) that buy and sell
mortgages. That makes sense.
In recent years, they've attracted plenty of controversy. Earlier
this year, Fannie Mae admitted to accounting irregularities. Some
of its leading officers resigned, and the company cut its dividend
in half. Freddie Mac had suffered its own accounting and ethical
lapses two years earlier.
But the proposed reform would itself create a large problem. The
House of Representatives is considering a measure that would force
these GSEs to set aside 5 percent of their profits for an
"affordable housing fund."
That may sound like a small amount, but 5 percent would represent
an estimated $400 million next year alone. This money would be
handed over to non-profits that say they develop or manage
affordable housing. However, many of these groups also engage in
Take ACORN (the Association of Community Organizations for Reform
Now), which says it works to "build and preserve housing assets"
for the needy.
That's hardly the end of its to-do list. Last year, for example, it
was involved in voter registration controversies in several states,
and criminal charges may still be filed. It also lobbies for
government-imposed "living wages" far in excess of minimum wages
(and beyond what the group sometimes pays its own activists). An
excessive "living wage" could end up costing unskilled workers
ACORN also opposes President Bush's proposed Social Security
reforms (although it's not clear how such reforms would affect
housing) and even stages protest rallies, including one at The
Heritage Foundation a few years ago.
Oh, and by the way, groups such as ACORN tend to be radically
liberal. That may explain why Rep. Barney Frank, D-Mass., pressed
to have this measure included in the GSE reform: It's an easy way
to fund liberal pressure groups at taxpayer expense. Fannie Mae and
Freddie Mac, in turn, would win an army of lobbyists for its cause
anxious to keep these monopolies -- and their money streams --
Luckily, the conservative Republican Study Committee spotted this
attempted giveaway. More than 50 of its members sent a letter to
Majority Leader Tom DeLay opposing it. "Personally, I'd rather burn
the money than give it to advocacy groups," Rep. Tom Feeney,
Or as Rep. Ed Royce, R-Calif., explained, the measure is little
more than "an experiment in socialism." We've already got plenty of
that -- no need for the government to demand even more.
Congress should, though, begin reforming Fannie and Freddie.
These federally supported financial monopolies help entry-level
homebuyers purchase their first property. But in recent decades,
they've come to dominate the real-estate market in general. That's
partly because they have an unfair advantage over their
private-sector competitors: They are each eligible to borrow as
much as $2.25 billion from the federal treasury.
As a first step, lawmakers should phase out that power, forcing
Fannie and Freddie to compete for funding on the open market. This
also would make clear that money invested through the GSEs is not
Unfortunately, too many people seem to think it is. And in fact,
since the two companies have so much market share, further
financial problems in just one of them could undermine the
entire U.S. financial market, which would probably lead to a
federal bailout with taxpayers footing the bill.
Instead, by privatizing them, Congress can bring small businesses
back into the mortgage market, diversifying risk without harming
homeowners or affecting the housing industry.
The affordable housing fund is a bad idea. Indeed, it would make
effective reform of Fannie Mae and Freddie Mac impossible. Let's
make sure lawmakers demolish this idea before it's too late.
Feulner is president of the Heritage
Many lawmakers want to fix Fannie Mae and Freddie Mac, the two huge government-sponsored enterprises (GSEs) that buy and sell mortgages. That makes sense.
Edwin J. Feulner, Ph.D.
Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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