If you had been hoping that you had heard the last about Fannie Mae and Freddie Mac, the mortgage giants, think again.

There are two big problems at present — one new, one old. The new problem is revealed by documents coughed up as the result of lawsuits by shareholders in Fannie and Freddie. They show that the Obama administration’s decision to vacuum up all of the profits from the two government-sponsored enterprises was not based on concerns that the GSEs might never be able to repay the bailout funds they got from Uncle Sam. Rather, the aim was to keep them in conservatorship for all eternity.

As a result, although Fannie and Freddie received slightly less than $188 billion in bailouts, they have “repaid” nearly $250 billion. This has kept them from rebuilding their capital reserves. It also has left investors high and dry. Money that should be going into their pockets is now going into the federal treasury. Investors call that an illegal taking of their property, and they have a good case.

On the other hand, simply returning the profits to Fannie and Freddie and allowing them to continue the status quo ante is not desirable, either. The two GSEs contributed mightily to the housing bubble, and enjoy wildly preferential treatment denied to potential competitors. This insulates them from market discipline and creates moral hazard.

Washington has created a massive Gordian knot here, and untangling it will require efforts of heroic proportion. The optimal path would involve winding down the GSEs and leaving home lending to the private banking system, which is well equipped to handle it. In the process, however, Washington will have to make whole the investors whom it stiffed when it confiscated profits it had no legitimate claim to.

Those excruciatingly complex tasks will fall to the next administration, which is probably a good thing. The current one seems to view the GSEs as a cash cow and little else.

Receive daily news emails sent directly to your email inbox

* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.
Load comments

You must be a full digital subscriber to read this article You must be a digital subscriber to view this article.