Fannie Mae and Freddie Mac are the quintessential federal government boondoggles.  Created in 1938 by FDR, the two institutions’ function is to buy mortgages and provide guarantees for the same in order to make homeownership more likely for more Americans.  Like many government programs, Fannie and Freddie’s objective is noble, but at the same time inappropriate for government to undertake.  The current subprime crisis accentuates this statement and provides an excellent opportunity for Uncle Sam to get out of the mortgage business since there are substantial reasons for its withdraw.

In the first place, and this should come as no surprise since Washington has meddled in areas prohibited to it by the Constitution for a long time, Fannie Mae and Freddie Mac are unconstitutional.  The words bank, lending, mortgage, or anything related cannot be found in the Constitution.  James Madison, the Father of the Constitution, fought bitterly on constitutional grounds against incorporation by the Congress of a national bank.  If the Father of our Constitution knew a national bank was unconstitutional then logically mortgage services would also be proscribed by the document.

Another important reason for Uncle Sam’s withdraw from the mortgage business has to do with conflicts of interest.  Even though Fannie and Freddie were originally set up as government sponsored enterprises (GSE), Presidents Johnson and Nixon made them publicly traded companies with authority to sell shares of stock.  The problem is that as a GSE the shareholders of Fannie and Freddie enjoy several big advantages over their competitors – a guaranteed line of credit with the US Treasury, cheaper borrowing costs, lower capital requirements, and an implicit federal guarantee against failure. 

Additionally, Fannie and Freddie have for some time now used taxpayer money to lobby for perks and privileges not afforded to their private sector competitors like exemptions from paying local and state taxes.  If that is not bad enough, Fannie and Freddie lobbyists have infiltrated this year’s presidential campaign.  Twenty or more of John McCain’s fundraisers have lobbied on behalf of Fannie and Freddie.  His campaign manager, Rick Davis served as president of an advocacy group led by Fannie and Freddie that lobbied for the duo against regulation.  Perhaps these contacts explain McCain’s recent remarks and his zeal for using taxpayer money no matter what the cost to keep Fannie and Freddie from failure. 

“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail … we will do what's necessary to make sure that they continue that function.” 

John McCain, July 2008

The bottom line is that Fannie and Freddie are very adept at using their government status to their advantage.  That is the price to be paid when government is allowed to incorporate a business.

Lastly, the federal government should unload Fannie and Freddie because they are bailout prone.  They have been allowed to play fast and loose with taxpayer money and now face insolvency.  Combined, both institutions own or have guaranteed $5.1 trillion in mortgage debt.  This number is more than half the national debt of $9.5 trillion.  The figure represents more than half of all mortgage debt in the U.S.  With the current subprime crisis, it seems just a matter of time before one or both of these mortgage banks will face liquidity problems.  But, according to Ben Bernanke, neither bank is in danger of failure.  But how does he know that for sure?  No one has ventured any guesses as to when the current credit crunch will be at its bottom.  If neither bank is in any danger then why has there been a government bailout plan developed that includes even more extended lines of credit and gives authority to the government to buy shares in each company?  With $5.1 trillion in mortgage backed securities, even a small percentage of write downs will amount to a lot of money.  As inflation continues to soar, a Fed bailout will benefit Fannie and Freddie’s stockholders at the expense of the rest of us.  How just is this?

What should be done?  I have a suggestion that I am sure will go over well.  All the politicians and their corporate buddies that love Fannie and Freddie so much should pool their resources and purchase the institutions.  They could set up a truly private firm by selling stock and playing by the same rules as their competitors.  Certainly, with so many valuable assets in the control of politicians, selling stock in the new companies will be no problem.  Better yet, the federal government will be out of the mortgage game and the American taxpayer will be liberated from the conflicts of interest, violations of the Constitution, and bailouts.     

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia.  Send him email at lovesliberty@gmail.com.