Opposition to Housing Subsidies = You Are Un-American

September 8, 2008

While reading some commentary on the Freddie and Fannie news, I ran into this story from the Washingtonian Magazine from six years ago that foreshadowed the current mess and told of the arrogance of Fannie Mae’s leadership and some of those in Congress that think maximizing homeownership is the most important role for government, whatever the costs. Do you remember Pres. Bush in his SOTU address citing homeownership rates as a great achievement of government? In fact, Bush once said, “Part of being a secure America is to encourage home ownership.” (I guess Bush using the word “security” about every topic under the sun shouldn’t surprise us.)

Here’s one such excerpt from the Washingtonian article:

Several governmental agencies have concluded that, taken together, these gifts–the implied backing, exemption from state and local taxes, exemption from disclosure and registration rules–are a taxpayer subsidy. Fannie calls the subsidy “theoretical” because the government has never sent the company a check. A better measure, experts say, is how much another company would pay to get the same deal.

The Congressional Budget Office has tried to figure that out. The first time, in 1996, a Fannie spokesperson said, “This is the work of economic pencil brains who wouldn’t recognize something that works for ordinary homebuyers if it bit them in their erasers.”

Then in 2001, CBO did all it could to assuage Fannie and Freddie’s concerns and consult with independent economists before issuing the report. After receiving a courtesy draft, Fannie announced that the report should be “completely disqualified from any serious consideration.”

Why the fuss? To start, CBO found that the subsidy to Fannie and Freddie is worth about $11 billion a year. Some object that many of those benefits go to the well-off. Raines’s response: “Talk to Congress.”

He has a point. Congress likes the idea of homeownership, and the mortgage-interest tax deduction and other housing tax breaks cost the government $100 billion a year.

What Fannie really wanted to suppress was another CBO finding: that for every $3 of the subsidy that the company passes on to homeowners, it keeps almost $2 for its stockholders and executives. In other words, taxpayers are subsidizing billions of Fannie’s profits each year.

“This is worse than $600 toilet seats,” says economist Bert Ely.

“It’s a slush fund,” says consumer advocate Ralph Nader.

It gets better:

It’s not that the companies are famously well managed. It’s that investors are sure they’ll be repaid–if by no one else, by the US government. Uncle Sam would never let Fannie and Freddie default on more than a trillion in bonds, the thinking goes, because the government created them in the first place.

That means if housing prices crash or either company stumbles, the taxpayers could be on the hook for hundreds of billions. It’s as if the public had cosigned Fannie and Freddie’s debt, says Lawrence White, a New York University business-school professor and former Freddie Mac director. To pay for a very small cut in mortgage rates, White says, the taxpayers bear the risk of a massive bailout.


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