IT HAS been seven years since the U.S. government took over Fannie Mae and Freddie Mac to prevent those two mortgage-finance giants from collapsing and taking the economy down with them. With massive taxpayer help, Fannie and Freddie returned to profitability and more than repaid the $187 billion that the Treasury Department pumped into them. So when Mel Watt, the federal regulator who acts as de facto chief of both entities, lifted the cap on compensation for the chief executives in July, this was no more than an appropriate reward for a job well done, right?
Not exactly. Any time a federal official decrees a $4 million annual compensation target for each of those who run a duopoly of “government-sponsored entities” (GSEs), it’s problematic — both in reality and in perception. The Obama administration was right to protest Mr. Watt’s decision, and now Congress is, fortunately, on its way to overturning it via legislation that has passed the Senate unanimously and cleared the relevant committee in the House by a 57-1 vote.
Mr. Watt’s predecessor, Edward DeMarco, capped the CEOs’ pay at $600,000 each in 2012. The market rationale Mr. Watt invoked for ending that — complex financial entities compete for talent with Wall Street, and the pay packages he has approved still rank below those of 75 percent of comparable private-sector CEOs — was inapposite. As the Wall Street Journal reported, only Fannie’s CEO, Tim Mayopoulos, campaigned for a raise; Freddie’s Donald Layton did not. Worse, moving CEO pay back in the direction of pre-crisis levels encouraged the perception that an exceptional situation, government backing, is the new normal, or, in this case, a repeat of the old, pre-crisis normal: publicly backed entities that pursue both a public purpose and private profits.
Mr. Watt should never have been in a position to call this shot. It is long past time for the administration and Congress to abolish the two entities and produce a new housing finance system, but housing lobbies that fed off the old system, and dream of resurrecting it, have so far thwarted an overhaul. That is why a second piece of legislation ought to pass promptly along with the CEO pay measure: the Jumpstart GSE Reform Act, newly reintroduced by a right-left coalition in the Senate made up of Republicans Bob Corker (Tenn.) and David Vitter (La.), and Democrats Mark Warner (Va.) and Elizabeth Warren (Mass.). The measure would forbid increased Fannie-Freddie mortgage guarantee fees being used to pay for other government spending and prevent Treasury from selling any of its preferred equity in the entities without prior congressional approval or a structural reform to housing. Though it would not create a new housing finance system, the bill would encourage lawmakers to stop procrastinating.