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Opinion

A roundup of editorials on federal takeover of mortgage giants

Tucson, Arizona | Published: 09.11.2008
The following editorial appeared in the Miami Herald on Tuesday:
More than a handout this is a full-fledged bailout
The government's seizure of mortgage giants Fannie Mae and Freddie Mac is sobering evidence of the depth of America's housing and mortgage crisis. Only six weeks ago, Congress approved a housing-rescue package that authorized the Treasury Department to extend credit to Fannie and Freddie — if the mortgage titans needed it — to avert a loss of confidence that could trigger a worse crisis. Now the government is saying, in effect: Forget the loan; we have to intervene directly to restore confidence. It was a tough call, no doubt. But truth be told, there was no choice.
The banking, housing and investment markets had looked cynically at the loan guarantee and asked: If cash is necessary, how much and where is it? If the money isn't needed, why offer it in the first place? In other words, the market called the government's bluff, even though the bailout attempt wasn't really a bluff but a sincere effort to reverse the worst housing crisis since the 1930s.
By seizing Fannie and Freddie, the federal government moved boldly to change the dynamic of the downward-spiraling housing market. Will it be enough? Very likely — but that judgment will take time. On Monday, though, the financial markets reacted strongly and positively to the announcement — as they should.
With the takeover, the government puts the giant mortgage enterprises under a conservatory managed by the Federal Housing Finance Agency. Treasury Secretary Henry Paulson didn't say how long the housing agency would run Fannie and Freddie, but the idea is to restructure their operations and put them on solid financial footings. Nor did Mr. Paulson say when or in what form Fannie and Freddie would emerge — as private companies, a new version of themselves or something else. Private bankers were appointed to run the companies, and the current CEOs were shown the door — with generous multimillion-dollar severance packages, of course.
With such a strong show of federal support, the takeover likely will calm the nerves of both domestic and foreign investors. The move also may give a boost to the housing market and nudge interest rates downward, all of which can help to stimulate the flagging U.S. economy.
Some bankers and shareholders in the two companies may lose part of the value of their holdings and, ultimately, American taxpayers are at risk if the plan doesn't work. Those are risks worth taking. Considering that Fannie and Freddie collectively own or support more than half of the nation's mortgage debt, there was little choice but to try an aggressive rescue.
Fannie Mae and Freddie Mac were created to promote home ownership and housing competition. They have been hugely successful: Home ownership in the United States is among the highest in the world. With good management and better government oversight, they are worth saving.
The following editorial appeared in the Chicago Tribune on Tuesday
Bail out of future bailouts
A couple of years ago, the idea of the federal government taking over the mortgage giants Fannie Mae and Freddie Mac would have sounded outlandish. But more than a year into the nation's mortgage meltdown, a lot of things that once seemed impossible have come to pass. Under the circumstances, the rescue was the only option. But it should also awaken Congress and the president to the need to avert future bailouts.
The two public-private entities, which have debt and securities worth more than $5 trillion, are the lifeblood of the U.S. housing market. They hold or guarantee half of all mortgages, and in recent months, as other lenders have fled, they have accounted for two-thirds of all new home loans. But they were in danger of imploding, as their share prices plunged and they found themselves badly short of capital. The Treasury intervention over the weekend was deemed essential to avoid a collapse that would have done to the economy what Hurricane Katrina did to New Orleans.
Even experts who favor a minimal federal role in the economy acknowledge the need. George Mason University economist Tyler Cowen warned that if the two were allowed to fail, foreign capital would dry up, the dollar would drop 30 or 40 percent in a matter of days, the Dow could lose half its value, most U.S. banks would be insolvent, unemployment would soar into the double digits, and "many Americans would not have access to their savings."
That's a tsunami worth avoiding. But the rescue doesn't come cheap. The Treasury Department said it is prepared to come up with as much as $200 billion—and chances are that if the tab is higher, it will pay that too. The taxpayer exposure is potentially huge.
There are some offsetting benefits. Experts think the bailout will limit the slide of home prices, to the benefit of both banks and homeowners. Interest rates should inch down, bringing more buyers into the market. The stock market responded with a rally.
But the big benefit will come if policy-makers admit the lesson of this near-catastrophe: It's reckless to let Washington provide implicit support to private companies. Once this deal has worked itself out, the government needs to make an orderly withdrawal from the business of mortgage lending.
For a long time, Washington's widely assumed guarantee of the solvency of Fannie Mae and Freddie Mac looked like a costless way to promote home ownership. But now it's clear that the federal commitment gave them a competitive advantage, which helped them grow so big they could not be allowed to collapse. So when the dust settles, Congress and the president should recognize that the home loan business can operate just fine without this sort of government role. If they insist on sticking with the same model that produced this crisis, sooner or later they will face another one.
The following editorial appeared in the Kansas City Star on Tuesday:
Taxpayers are left holding the bag
The government seizure of Fannie Mae and Freddie Mac was welcome but long overdue. They should be restructured in ways that will protect taxpayers from similar debacles in the future.
With the government already facing unprecedented debt and liabilities, Washington also needs to be figuring out a responsible way to pay for this massive clean-up project.
Taxpayers will be on the hook for future losses at the two mortgage giants, but the takeovers avoided what could have become a global financial meltdown.
Fannie and Freddie own or back up $5 trillion in mortgages. The agencies' bonds are held by investors around the globe, foreign central banks and pension funds.
The two companies lost $14 billion over the last year, and losses will continue to mount until the housing crisis abates. The Treasury says it will pay up to $200 billion to cover potential red ink.
To support the reeling housing market, Fannie and Freddie will be allowed to continue buying and holding mortgages and securitizing home loans until 2010 — presumably after the housing crisis has abated.
If Congress can't agree on a restructuring plan by then, their mortgage holdings will be steadily reduced by 10 percent a year until they reach a combined $500 billion.
Neither Fannie nor Freddie should be allowed to continue as in the past. They should be broken up into smaller, fully privatized entities, none "too big to fail."
Perhaps the most significant statement from last weekend's announcement was Treasury Secretary Hank Paulson's conclusion that the companies should not be allowed to "continue in their current form."
He's right. The two are for-profit corporations owned by their shareholders. But they were chartered by Congress to support the housing market — an arrangement that created an implied government backing for the debt they sold in the credit markets. That backing has now become explicit.
This unusual structure allowed them to borrow money at rates almost as low as the Treasury itself, a subsidy that the Congressional Budget Office calculated at up to $42 billion in 2003.
The companies have long claimed that the subsidy helped lower-income people buy homes, but the Congressional Budget Office said only about two-thirds of the subsidy actually helped borrowers get cheaper mortgages.
Shareholders and Fannie and Freddie executives have profited for years from this hybrid business plan — private profit, public risk. Now taxpayers have been left holding the bag.
When it comes time to decide the companies' future form, the first priority of the next Congress and president should be to make sure that this sort of risk is permanently removed from taxpayers.
The following editorial appeared in the Philadelphia Inquirer on Tuesday:
Damage Control
It's a bitter pillow to swallow, but the Bush administration had little choice but to rescue mortgage giants Fannie Mae and Freddie Mac, despite the potentially high cost to taxpayers.
Over the weekend, Treasury Secretary Henry Paulson removed the CEOs of both companies and put the institutions into a form of bankruptcy. A new regulator will oversee their operations.
When taxpayers are told that a government rescue plan "might" cost a certain amount, you can bet it will end up costing even more than projected.
Paulson doesn't want to guess how much this bailout will cost. But Treasury is prepared to shell out $100 billion for each of the companies, potentially burdening taxpayers with huge losses from mortgages written by private lenders.
The government's seizure of the two quasi-public mortgage financiers is a sobering sign of how bad the housing and credit crisis has become. Fannie Mae and Freddie Mac hold or guarantee about $5.3 trillion of mortgage debt, about half of the outstanding mortgages nationwide.
President Bush is right; the two institutions are too important to the housing market and the wider economy for the administration to take no action. But it'll be a little harder next time to listen to policy-makers in either party extol the virtue of free markets. When the stakes are high enough, virtue flees.
With taxpayers on the hook, Congress should be asking how the executives at Fannie Mae and Freddie Mac allowed their situations to grow so dire. Earlier this summer, Paulson hired Wall Street firm Morgan Stanley to examine their books. Those investigators found unusual accounting practices at the companies that covered up serious deficiencies in their capital reserves.
That's incredible, because an accounting scandal roiled Fannie Mae and Freddie Mac just five years ago. They supposedly had put their houses in order as a result. But now it appears that Freddie Mac CEO Richard Syron instead ignored internal red flags that his company was in perilous condition.
And while all this was happening, where was the oversight by Congress?
The bailout already seems to have had the effect of calming world financial markets. The action also is likely to lower mortgage rates for consumers, who are trying to cope with the worst housing downturn in generations.
Bondholders, such as mutual funds and foreign governments, will be protected. But shareholders of Fannie Mae and Freddie Mac won't fare as well, because dividends are being eliminated and share prices are expected to fall further.
Treasury officials say the two companies eventually could be structured like public utilities, raising money by issuing stock, but with returns capped by regulators. That would allow them to keep supporting the mortgage industry without risking more of the public's money.
Congress needs to take a closer look at how Fannie Mae and Freddie Mac got into such bad shape in the first place, and determine how the damage to taxpayers can be limited.
The following editorial appeared in the Milwaukee Journal Sentinel on Tuesday:
Best of bad options
The federal government seized mortgage giants Fannie Mae and Freddie Mac over the weekend, fired their management and put taxpayers on the hook for billions of dollars.
And if that sounds like a bad idea, consider the alternative: the failure of government-sponsored private companies that provide funding for three-quarters of all new home mortgages in the United States.
Fannie and Freddie could no longer survive without a massive infusion of capital. If Fannie or Freddie had failed, the nation's credit system might have failed along with them. Without Fannie and Freddie buying mortgages, bundling and selling them to investors, the mortgage market would have shut down.
Now, with luck, the credit markets will settle down, interest rates may decline a bit and troubled borrowers may get a chance to cut new deals. Wall Street responded positively to the news, with the Dow Jones closing up 290.43 points on Monday.
We're glad for Wall Street, but it's too bad Main Street has to foot the bill.
Congress and the Bush administration long ignored warnings from former Federal Reserve Chairman Alan Greenspan and others that the companies were too politically connected and held portfolios chock-full of risk. To some extent, the government is still protecting Fannie and Freddie shareholders. Sure, they still might be wiped out. But it was within the power of the feds to eliminate them as part of this deal, and Treasury Secretary Henry Paulson took a pass. Will shareholders in the next failed bank get the same deal? Let's hope not.
For years, Fannie and Freddie took excessive risk, knowing they had a sugar daddy who would bail them out. They were created by Congress to prop up the housing market, but their two-headed nature — private profit, public risk — has long perverted market forces. The two, meantime, have faced allegations they cooked the books, and it remains unclear just how much bad debt they hold.
Paulson hopes to prod Congress to end this failed model, but that hard work will now pass to a new administration and Congress. The best option might be an entirely private secondary mortgage market, but one that is subject to stricter government regulation. Another alternative: permanent nationalization.
As Paulson himself noted Sunday, "Market discipline is best served when shareholders bear both the risk and the reward of their investment."
So why didn't Paulson hold Fannie and Freddie shareholders fully accountable when he had the chance?
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