Federal Takeover of Fannie Mae and Freddie Mac - Previous Attempts For GSE Reform

Previous Attempts For GSE Reform

The GSE business model has outperformed any other real estate business throughout its existence, which many critics ignore. According to the Annual Report to Congress, filed by the Federal Housing Finance Agency, over a span of 37 years, from 1971 through 2007, Fannie's average annual loss rate on its mortgage book was about four basis points. Losses were disproportionately worse during the crisis years, 2008 through 2011, when Fannie's average annual loss rate was 52 basis points. Freddie Mac's results are comparable.

By way of contrast, during the 1991–2007 period, commercial banks' average annual loss rate on single family mortgages was about 15 basis points. During the 2008-2011 period, annual losses were 184 basis points.

Or take a look at the FHFA study that compares, on an apples-to-apples basis, GSEs loan originations with those for private label securitizations. The study segments loans four ways, by ARMs-versus-fixed-rate, as well as by vintage, by FICO score and by loan-to-value ratio. In almost every one of 1800 different comparisons covering years 2001 through 2008, GSE loan performance was exponentially better. On average, GSE fixed-rate loans performed four times better, and GSE ARMs performed five times better.

However, other critics in D.C. claim that the GSE business model faces inherent conflicts due its combination of government mission and private ownership. According to the American Enterprise Institute, a conservative think-tank: "The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk-taking and profitability. But there were two other parties—Congress and the taxpayers—that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSEs' ability to hold down mortgage rates, but it garnered even more political benefits from GSE support for affordable housing."

In 2003, the Bush Administration sought to create a new agency, replacing the Office of Federal Housing Enterprise Oversight, to oversee Fannie Mae and Freddie Mac. In 1992 in the wake of the Savings and Loan crisis, and over concern similar lending problems would develop, the Office of Federal Housing Enterprise Oversight was created as part of the Department of Housing and Urban Development. While Senate and House leaders voiced their intention to bring about the needed legislation, no reform bills materialized. A Senate reform bill introduced by Senator John Corzine (D-NJ) (S.1656) never made it out of the 21-member (10D/11R) Senate Banking, Housing, and Urban Affairs Committee. At the time members of the 108th congress expressed faith in the solvency of Fannie and Freddie. Congressman Barney Frank (D-MA), for example, described them as "not facing any kind of financial crisis."

In 2005, the Federal Housing Enterprise Regulatory Reform Act, sponsored by Senator Chuck Hagel (R-NE) and co-sponsored by Senators Elizabeth Dole (R-NC), John McCain (R-AZ) and John Sununu (R-NH), would have increased government oversight of loans given by Fannie Mae and Freddie Mac. Like the 2003 bill, it also died in the Senate Banking, Housing, and Urban Affairs Committee, this time in the 109th Congress. A full and accurate record of the congressional attempts to regulate the housing GSEs is given in the Congressional record prepared in 2005.