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July 11, 2005

The Money Pit

By

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 other activities.

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 their jobs.

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 -- going strong.

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, R-Fla., said.

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 federally guaranteed.

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.

Ed Feulner is president of the Heritage Foundation.

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