Fannie and Freddie

by Rep. Ron Paul, MD

Ron Paul in the House Financial Services Committee, September 10, 2003

Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Dr. Ron Paul is a Republican member of Congress from Texas.

no prophet AND NOT SMARTER.

not a cut, OK?

here's why.

the liquid capital reserves of freddie and fannie ,were in 2000 and getting worse now with resets in a stagnated market, are typically too low to absorb a 15% of the protfolio going into foreclosure.

How to profit from resets ; an assurance that values continue to climb.

how to bankrupt from resets; when house prices are beyond the 3/1 ratio in general, and on average, for the typical homebuyer.

The problem with a 3/1 ratio is the wage capacity, as a trend, of the American homebuyer.

3/1 means that the house price is three times (OR LESS_) of what the buyer earns in a year.

example: house=250,000 annualy salary = 84,000.


That is not happening.

the average wage in the San Francisco Bay Area is 56,000 by liberal estimates according to US Census Bureau statistics for 2006.

In the Bat Area, a house, on average, should be then priced at 165,000. That is not the case. The average home price after a 40% correction the middle market this year ia around 420,000.

Wayyyyyy out of whack.


this problem is all over the country.

When the market stagnates, those with ARM loans "reseting" the interest rate to the normal rate increase mortgage payments by up to 300%.

If the house cannot be sold to cover the reset, then foreclosure occurs.

As the market slowed and prices stagnated because sales slowed due to the exhorbitantly high cost of housing, buyers were not buying, nor qualifying.

Bailout pricing exascergbated the poroblem.


banks contracted the required equity to build in a downturn in prices as a safety net for a stable future loan made and hence asked for 30% down expecting a 25% downturn and still have some equity on the table makig the risk of lending viable.

This smart and prudent requirement of banks also added to further slow sales.

I could go on and on and clinic everyone here on the reality of the mess, but my example serves to explain my point sufficiently.


The moral of the story; wishful thinking, greed , and the exectastion of higher prices beifre the top would be reached made everyone put blinders on except those with the most to lose....solvent bankers.

Solvent bankers were not making these crazy loans with zero down and negative amortization, the brokers were and packaging them off to investors.

freddie aND FANNIE GOT CAUGHT IN THIS GARBAGE LENDING BY cLINTON WANTING EVERYONE TO HAVE A HOME AND CLINTON EASED RESTRICTIONS ON LOANS PICKED UP BY FREDDIE AND FANNIE.\\\OOPS, CAPLOCK KEY lol


This was known by all of us in the industry long ago.

I was a lone wolf of warning while my peers were diving in head first.

no one told anybody outside the industry much of this.

those of us that did warn, were not listened to anyway.

The Feds knew the problem was coming, kids, back in the 90s.

Clintons sell was that the capital gains tax on the sales fueled enhanced revenue for the US Treasury.

It made him look good for a season.

Welcome to clintonian economics .00000101

Well it almost sounded right, almost.

While your numbers make sense, what doesn't make sense is, Dr.Paul isn't right, even though what he said about Freddie and Fannie happened...

If you notice, the Dr. mentions the Governments intervention in the market ( your Clinton reference)

The point is, the door was left wide open for them, because of the Governments assured protection of something that is supposed to be apart of the market.

it didn't sound right then either.


it's just tooooo hard to swallow, isn't it?


well, digest it.
\
It is what it is.

the government guaranteed nothing.

This is not about the mortgage guarantees.

the homeowner policies have nothing to do with this.

the mortgage insurance underwriters will collapse the whole market if they have to pick up the losses. They cannot.

When capital reserve requirements are negative, then even freddie and fannie are insolvent.

the government was never required to pick up the slack, only fund the acquisitions and use the proceeds to further pick up the bank written notes.

The fed is there to keep them liquid, not insure their existence.

freddie and fannie have not the same capital reserve requirements that banks do, and that was slowly being risen to meet the need for liquidity. But not fast enough.

my overview is oversimplistic.

it is just a soundbyte of the highlighted triggers for failure factored in under the scenerio of a downturn.

The fact that the Federal Reserve is stepping in under the ginnie mae charter is more about daily liquidity in the world economy than guaranteeing these loans.

freddie and fannie's sstock price dropped last week by 85%, but only the preferred stock is protected at all of any return, no matter how dismal. the common stock is worthless. That step of plugging in the loss beofre the intervention saved only pennies on the dollar for the holders of the common stock...i.e. 401k and 503b portfoilio investments.

The lack of liquidity of the common stock, by law, allows the fed to step in and redeem the remainder of the assets, but the freddie and fannie game is bust. It is now bye bye.

no more affordable housing for the middle class kids.

who will builders build for in the future?

first time buyers? nope.

move up buyers? nope.

the rich?


the "government's intervention" sounds easy enough to include Clintonian nightmares, so say that, then.

The Federal reserve is a bureaucracy, not a policy thinktank or a check and balance of the executive branch, it is an agency directly responsible to the chief executive officer.

Even Bsh couldn't look more like an idiot without breaking the law which requires the President to wait on the triggers. He cannot pre-empt the triggers that call the day of reckoning.


This is just one of the problems with our federal government, as Mc Cain has been saying.

It is operating in the past and way behind the market realities.

nobama has no clue what the HE!! Mc Cain is talking about.

neither does Ron Paul!!!!!

The Federal Governemnt is being run into the ground by kids running the store like it's a candy store and they have been sticking their hands in the candy jar far too long playing with fire for short term applause knowing full well that finger pointing will accompany the next administration's watch with tied hands.

The libtardicans do it to each other.

But Mc Cain sees it and talks about it, but the partisan bickering is keeping the libtards from getting on board with him.

Mc Cain doesn't give a flip which party is in the White house, but he is deternmined to work for us and get these problems addressed and he says he will name names as the idiots that do this $hit to us try to continue doing it under his watch.

It is why he picked Sarah Palin.

he knows she knows.

so do the libtards, or they wouldn't twist her record like they do.

No matter.

He's got this.

but we're screwed for a while.

Thankfully, the old curmudgeon has the balls to do the right thing.


not like me to use words like this, but hey.....


the shoe fits.

Wow, I couldn't disagree with you more.

The government doesn't "insure" the GSE?
That "insurance" via the subsidies didn't create an artificial trust in that area of the market?
The subsequent bubble that followed that artificial propping up of the GSE's didn't give these lenders the false notion that they could just loan any direction they wanted to, regardless of ability to pay?

exactly.

i don't connect the mortgage brokers and their investor paks of high risk high yield notes with the situation facing freddie and fannie as a direct influence, but as a factor that contributes to stagnating and interfering with the market.

the consequences inure to the detriment by virtue of the correction that necessarily must follow.

It is about trading up and freeing notes on the sale to be rewritten. Market inactivity and foerclosures as a result affect even freddie mac and fannie mae. More especially so, as has happened, in fact.

I am being very simplistic, as I have said.

But the fact remains that housing has become too expensiv for first time homebuyers and there is no market for them.

If there is no market for them, there are no move up buyers.

The very low capital reserves at freddie and fannie and tabling the costs of foreclosures is their liquidity crisis.

The bet was on the norm being assumed. That norm is that 97% of all mortgages flip on sale every three years.

freddie aND FANNIE ARE BURDENED WITH A COLLApse by virtue of the foreclosure rates experienced by homes mortgages held that have corrected to henegative values by 30% or more.

Their whole portfolio is upside down now.

Same mess at AIG, though a different set of circumstances.

Same principle involved.


We are not to be worried about inflation, my friend.

We are to brace for deflation.


we do not have a model for dealing with that.

So we print money to cover the transactions that are unwinding looking for cash to cover bad paper and insolvency of many financial houses.

M1 and M2 are broken.

get it?

I could be wrong...

This looks like ENRON with a different skin.

They are saying the same things.

The people that hold the true assets are not losing any real money.

Our politicians ain't going to do anything real about this situation cause they all got money from it.

yup.

it's that simple.