Forcing Fannie Mae and Freddie Mac to divest themselves of most of their mortgage holdings won’t spread the financial risk or ensure the economic security of the home loan market.

Taking Property and the Dream

It was only a month ago that Republicans couldn’t raise their hands fast enough in defense of property rights and home ownership.

The Supreme Court had decided that the government could take people’s homes for private development, and Republicans were outraged.  In fact, they were in disbelief.

Only a week later, all but 10 of the 230 Republicans in the U.S. House of Representatives took to the floor and cast votes expressing their “grave disapproval” of the Supreme Court’s bare majority decision.  Their colleagues in the Senate were equally aghast and, led by Senator John Cornyn, sponsored a bill that would prohibit federal funding of any project that involves taking private property for economic development.

But that was a month ago.

Late last week, the Republicans — at least those sitting on the Senate Banking Committee — decided that protecting property rights and supporting home ownership wasn’t necessarily such a good idea.

In what could be the biggest government thievery in recent memory — and, perhaps, ever — the Republicans on the Senate Banking Committee approved a bill on a straight party-line vote that would force home mortgage leaders Fannie Mae and Freddie Mac to sell off hundreds of millions of dollars of their assets.  In other words, 11 Senate Republicans voted to deprive Fannie and Freddie’s shareholders of their property — namely, the capital that makes up most of the value of those companies.

But that’s not all. The bill would not only allow the government to rob Fannie and Freddie’s shareholders of the property that rightfully belongs to them, but it would also threaten the dream of property ownership for countless more Americans.

You see, for more than three-and-a-half decades Fannie and Freddie have played an irreplaceable role in America’s home mortgage market.  The two companies keep lenders supplied with cash to make home loans by buying mortgages, repackaging them as securities, and selling them to investors.  This constant reinvestment in the mortgage market not only provides the capital that allows Americans to get home loans, but it does so with such efficiency that mortgage interest rates have fallen to historic lows.  Quite simply, thanks to Fannie and Freddie more Americans (nearly 70 percent) own their home than ever before and are paying less interest to do so.

So what’s the problem?

Well, according to Federal Reserve Chairman Alan Greenspan and Senate Banking Committee Chairman Richard Shelby, Fannie and Freddie are too good at what they do.

Chairman Greenspan told Senator Shelby’s Committee that Fannie and Freddie are buying so many mortgages and have gotten so large that the mortgage leaders could pose a “potential systemic risk to the American financial system.”  Greenspan’s solution, embraced by Senator Shelby’s bill, is simple — Fannie and Freddie must divest, or sell off most of their mortgage holdings to other financial institutions.

According to Fannie and Freddie’s critics, divestiture will shift the financial risk and ensure that the mortgage leaders can’t trigger the collapse of the entire home loan market if an economic catastrophe should occur.  Besides, the critics note, Fannie and Freddie have an unfair advantage because investors assume the federal government will bail out the mortgage leaders if and when a financial crisis occurs because they are government chartered.

Unfortunately, these arguments not only ignore the property rights of the shareholders but also the consolidation in America’s banking industry.

After all, there really isn’t any difference between the government forcing public companies like Fannie and Freddie, owned by shareholders, to sell off the financial assets of their business and the government telling a family that they must sell off their primary physical asset — their home.  In both cases the government is forcing property owners to sell.  And, to add insult to injury, in each case the property owners can’t even set their own asking price.

Even ignoring the important property rights at stake, forcing Fannie and Freddie to divest themselves of most of their mortgage holdings won’t spread the financial risk or ensure the economic security of the home loan market.  In recent years, consolidation has swept through America’s financial sector, creating mega-banks like Chase, Citicorp and Bank of America.  Thus, if Fannie and Freddie must sell off their supposedly “risky” assets, those liabilities will only be transferred to a similarly small group of mega-banks that could themselves collapse in an economic crisis. 

Moreover, no one really believes that the federal government would turn its back on a failing home loan market, whether those mortgages were held by Fannie and Freddie or a group of mega-banks.  After all, back in the 1980s, the federal government didn’t tell the Savings and Loans that they had to fend for themselves in the face of impending financial disaster, it bailed them out.

So its time for Republicans to remember the outrage and disbelief they felt a month ago when the Supreme Court told them that the government can take anyone’s property, at any time and for any reason — because they’re making the very same mistake.  The only difference is that the Republicans would be taking property and the dream to own it, too.

August 4, 2005
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