The proposed Federal Mortgage Insurance Corporation (FMIC) would just be “an expansion of the type of government intervention that fueled the housing crisis in the first place,” the April 22 letter stated.
It was signed by representatives of the Competitive Enterprise Institute (CEI), FreedomWorks, the Club for Growth, and Citizens Against Government Waste, among others. (See Johnson-Crapo Coalition Letter 4-21-2014.pdf)
Senate Banking Committee Chairman Tim Johnson (D-SD) and ranking member Mike Crapo (R-ID) said in a March 16 press release that their proposal “will protect taxpayers from bearing the cost of a housing downturn, promote stable, liquid and efficient mortgage markets for single-family and multifamily housing, [and] ensure that affordable, 30-year, fixed-rate, prepayable mortgages continue to be available…”
But conservative leaders countered that the new entity would not protect taxpayers. Instead, they said the bill would “create housing ‘trust funds’ not subject to Congressional oversight." Furthermore, it "contains very few safeguards to keep those funds’ money from being diverted for political purposes.
“The notorious, now-defunct Association of Community Organizations for Reform Now (ACORN) was found by a government inspector general to have misused housing grants for political activity,” the letter pointed out. “Without oversight, other groups could similarly misuse taxpayer dollars under the new ‘trust funds’."
“I call it Feddy MIC. It’s not an improvement. It would be much worse. It would itself create hundreds of Fannies and Freddies,” John Berlau, senior fellow at CEI, told CNSNews.com.
“It creates more moral hazard, more government dependency, and violates property rights by codifying the Obama administration’s rip-off of Fannie and Freddie shareholders,” Berlau continued. “It’s Fannie Mae and Freddie Mac on steroids.”
Last year, nearly 20 Fannie and Freddie shareholders sued the Treasury Department over a 2012 decision to shut them out of any of the GSEs’ future profits, which they characterized as a “back-door nationalization”.
“Why should the nation go through this legislative exercise if the end result will be a system so similar to the one that just imploded?” Heritage Foundation senior policy analyst John Ligon and research fellow Norbert Michel asked in a position paper on the issue.
Nearly 100 percent of the housing market, which accounts for almost 20 percent of the American economy, is currently backed by Fannie and Freddie, which buy mortgages from banks and other financial institutions and then resell them on the secondary market as mortgage-backed securities.
However, this system - which encouraged banks to underwrite risky “sub-prime” loans - imploded in 2008, when Fannie and Freddie were seized by the federal government during a $188 billion bailout.
At the end of March, Fannie and Freddie, which are still under a federal conservatorship, had repaid the government $203 billion. The White House’s Office of Management and Budget (OMB) estimates that they will return a profit of $181.5 billion to the U.S. Treasury over the next decade if they remain under government control.
However, the independent Congressional Budget Office (CBO), using a different accounting method, calculates that under the current set-up, these off-book federal entities will actually cost taxpayers $19 billion by 2024.
“The current cash-flow [accounting] approach used to report the impact of GSEs on federal finances fails to account properly for taxpayers’ exposure to risk from federal control of Fannie and Freddie,” Heritage fellow for federal budgetary affairs Romina Boccia notes.
“The result is that the entities appear to be a boon for taxpayers because they reduce the reported federal deficit. This fiscal illusion encourages higher federal spending today while putting taxpayers on the hook for future bailouts.”
Berlau agreed. The proposed FMIC has a 10 percent “first loss” requirement, which can be waived in the event of a future housing crisis, but it still leaves taxpayers on the hook for the remaining 90 percent, he pointed out.
“It explicitly guarantees the trillions [of dollars] in debt that Fannie and Freddie implicitly guaranteed, and we then had to end up paying. And so we don’t need to really replace Fannie and Freddie with anything. We just phase them out and replace them with nothing and let the free market work,” he told CNSNews.com.
“I always want to say [to Congress] where there's an urge to do something: ‘Don’t just do something, stand there.’ This is worse than worthless,” he added.
However, the Johnson-Crapo bill is supported by a coalition of housing groups and financial institutions, including the Financial Services Roundtable, which has been running an ad stating that the bill would "replace the failed mortgage firms Fannie Mae and Freddie Mac with a more durable system to provide access to affordable, safe and responsible mortgage finance." (See housing ad.pdf)
The Senate Banking Committee is scheduled to hold a mark-up of the bill on April 29th.