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Jewish World Review June 21, 2000 /18 Sivan, 5760

Michelle Malkin

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Consumer Reports

Fed up with Fannie and Freddie -- FANNIE MAE AND FREDDIE MAC. You've heard their names somewhere before, maybe from their warm and fuzzy TV commercials or ubiquitous newspaper ads. They are a pair of financial giants, and they claim to be American homebuyers' best friends: "Our business is the American Dream," Fannie Mae crows. "We open doors for millions all across America," Freddie Mac boasts.

Behind this well-funded public service campaign are two quasi-governmental corporations feeding stealthily at the public trough. According to the non-partisan Congressional Budget Office, Fannie Mae and Freddie Mac had received an estimated total of $6.5 billion in hidden taxpayer subsidies by 1995. The two agencies hog up to one-third of those subsidies for themselves. There's a bill in Congress that would begin weaning the two agencies off the federal dole. It couldn't happen soon enough.

Congress created Fannie Mae (nickname for the Federal National Mortgage Association) in 1938 to bolster home ownership during the Depression. Three decades later, it was partially privatized but retained a host of government benefits. In 1970, Congress spawned Freddie Mac (nickname for the Federal Home Mortgage Corp.) to provide a lending competitor to Fannie Mae. Both entities expand the pool of money for home purchasers by snapping up loans that lenders make to homebuyers, and then converting those loans into relatively safe mortgage-backed securities that are attractive to investors.

Everyone, it seems, profits homeowners, commercial and mortgage banks, savings and loans companies, and most of all, Fannie Mae and Freddie Mac. But this is not a proud capitalist success story.

As Fred Smith, president of the Washington, D.C-based Competitive Enterprise Institute, noted before Congress last week, this is a textbook example of "profit-side capitalism and loss-side socialism." When things go right for Freddie Mac and Fannie Mae, in other words, they keep the profits. But when things go wrong, government steps in and taxpayers bear the costs. Smith reminded the House Banking Committee's Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises: "This is what happened in the S&L crisis and the costs were massive." Indeed. That dreadful bit of loss-side socialism resulted in a $500 billion bailout by the public.

Freddie Mac and Fannie Mae are flawed public-private hybrids that receive unfair advantages in the marketplace. As "government-sponsored enterprises," the two institutions are exempt from normal securities regulations, as well as from state and local income taxes (a special perk valued at $690 million in 1999). In addition, the standard for how much money the government requires them to keep on hand in case homebuyers default on their mortgages is lower for Freddie Mac and Fannie Mae than for fully private banks and thrifts.

Freddie Mac and Fannie Mae also each receive $2.25 billion lines of credit with the U.S. Treasury. These special pipelines give the institutions an implied federal guarantee available to no other private sector competitors in the mortgage market. The government itself estimates that this perk results in about 40 percent of Fannie Mae and Freddie Mac's earnings. Much of that money goes into the pockets of Fannie Mae and Freddie Mac's management, shareholders, and extravagant ad budget, not low-income homebuyers.

Insight Magazine reports, for example, that in his first year as chief executive of Fannie Mae, former Clinton administration official Franklin Raines was paid more than $4 million and had almost $6 million in unexercised stock options. The magazine also notes that the two entities "place full-page ads almost weekly in the Washington Post at $34,000 apiece. Meanwhile, Fannie Mae spent $6 million on lobbyists last year and political contributions from Fannie Mae staff totaled almost $70,000 at the end of 1999, 75 percent of it going to Democrats."

Political cronyism. Corporate welfare. Billions of dollars in market-distorting subsidies hidden from public view. Fannie Mae and Freddie Mac's massive profits are their profits. But their debt is our debt. If Congress doesn't act soon to rein them in, these moochers who sell the American Dream may turn out to be taxpayers' worst nightmare.

JWR contributor Michelle Malkin can be reached by clicking here.


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© 2000, Creators Syndicate