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Support Legislation to Reform Fannie Mae and Freddie Mac
An Open Letter to the United States Congress
April 18, 2011
Dear Member of Congress:
On behalf of the 362,000 members of the National Taxpayers Union (NTU), I urge you to support legislative efforts to scale back the role of Government Sponsored Enterprises (GSEs), bring private capital back into the mortgage market, and reduce taxpayer risk.
In the years leading up to the financial crisis, Fannie Mae and Freddie Mac have leveraged their implicit (and more recently, explicit) federal guarantee to dominate the mortgage credit market. Their quasi-governmental status allowed them to borrow at below market rates, enjoy beneficial tax treatment, and maintain less strict capital requirements in order to charge artificially low fees. In short, the GSEs shareholders were engaging in a no-lose gamble with all the profit accruing to them but all the risk being borne by taxpayers. As a result of that gamble, American families and businesses have paid out more than $200 billion, a figure sure to rise given the government’s ill-conceived attempt to use the GSEs to prop up the housing market.
Republican members of the Financial Services Committee have introduced a package of eight targeted bills in order to address these problems and restore market-based principles to America’s housing finance system. Among the many beneficial proposals, Representative Neugebauer’s (R-TX) “GSE Subsidy Elimination Act” would phase in increases in guarantee fees to ensure that Fannie and Freddie are held to the same capital standards as private financial institutions. In order to reduce the GSEs unwarranted market share and hasten the divestiture of their holdings, the “Portfolio Risk Reduction Act,” introduced by Representative Hensarling (R-TX) would set annual limits on the maximum size of Fannie and Freddie. Additionally, the “GSE Mission Improvement Act,” introduced by Representative Royce (R-CA), would eliminate Fannie and Freddie’s misguided pursuit of “affordable housing goals” and would work to prevent the acquisition of risky mortgages.
These are just a few highlights among the eight bills introduced by House Republicans devoted to protecting taxpayers from the risky lending practices of the GSEs. Unfortunately, as long as Fannie and Freddie remain in their present form, the threat of their past excesses repeating themselves remains real. As NTU has stressed for the past two decades, the fiscal consequences of GSEs can take unpredictable and detrimental turns. So although this package of legislation contains many positive ideas, it is essential that we begin the necessary process of winding down the GSEs and putting them on a path toward competing in the free market. We support this effort to enact incremental reforms to Fannie and Freddie and we look forward to working with you in achieving the ultimate goal of eliminating the taxpayer risks associated with GSEs.