Fannie and Freddie
TUCKED AWAY in the year-end news was the revelation that regulators have approved pay packages of up to $6 million each for the chief executives of Fannie Mae and Freddie Mac. The companies are undoubtedly important: They back $5.4 trillion in home mortgages and account for nine-tenths of new home loan originations. But they are essentially bankrupt and depend on tens of billions of dollars from the Treasury. Indeed, their losses since falling into government conservatorship last year have been so large -- the Treasury has pumped in a combined $112 billion so far -- that the Obama administration expanded their $400 billion lifeline before its authority to do so expired Dec. 31.
Now it appears that some of the dough will support chief executive pay 15 times that of the president of the United States -- the firms' nominal master. To be sure, the latest Fannie-Freddie pay deals are considerably less than those that its top execs pulled down before the crash. Still, the perceived need to retain financial talent at this stunning rate of compensation is further evidence, if any were needed, that the public-private model for these mortgage giants is no longer sustainable.
The Obama administration has promised to roll out its ideas for fixing Fannie and Freddie early this year. Anticipating that, the Center for American Progress (CAP), a liberal think tank with ties to the administration, has proposed new entities called chartered mortgage-backed securities issuers (CMIs): privately owned firms that would package mortgages into securities and sell them with an explicit federal guarantee. Securitization fees would go into an insurance fund to protect taxpayers against defaults. Profits and product lines would be tightly limited by federal regulators.
The CAP proposal grapples with the fundamental problem of the old Fannie and Freddie: An implicit government guarantee permitted them cheap access to borrowed funds, which they gambled in pursuit of maximum returns to shareholders. It also wisely emphasizes that the new organizations must help rebalance federal support between rental housing and single-family homes. However, the CAP proposal would leave the new companies under political pressure to meet difficult-to-define "public purposes," such as funneling liquidity to "underserved" geographical areas. This seems not only risky but redundant, given the Federal Housing Administration's support for homebuyers of modest means.
A public-utility model for replacing Fannie and Freddie is plausible. But any new design for these entities will fail if it does not define the roles and responsibilities of taxpayers and shareholders with absolute clarity -- and absolute credibility.