In the aftermath of the financial crisis, the concept of government-sponsored enterprises such as Fannie Mae and Freddie Mac has become toxic in many political circles. But eight years after the companies were taken over by the federal government and put into conservatorship, it is time to return Fannie and Freddie to their status as privately owned public utilities. This is not only consistent with their original legal and economic mandate; it also makes policy and logical sense.
From their founding in 1939 and 1970, Fannie and Freddie were chartered by the government to create and maintain a secondary mortgage market so that during times of economic stress, when banks weakened, homebuyers could still attain mortgage credit. For generations, these firms acted like utilities and provided investors with stable earnings, lenders with liquidity, and homebuyers with the ability to get a 30-year loan regardless of economic conditions.
It was only when the companies' executives pushed them to become growth stocks that they went off the rails. From 1992 until the 2008 financial crisis, the companies suffered weak oversight and transformed from conservative utilitylike entities into growth companies promising investors a 20% annual return. Congress directed them to take on more leverage and risk by creeping into more direct competition with primary market lenders. The financial crisis, when it arrived, decimated both companies.
Now, however, Fannie and Freddie should operate as the privately owned public utilities they are, for the benefit of all market constituents. This will avoid the costs and risks of alternative economic approaches to ensuring nationwide mortgage availability.
This idea is not exactly heresy. It is strongly aligned with suggestions made in 1991 by Nicholas Brady, the U.S. Treasury secretary under George H.W. Bush.
Amid the savings and loan crisis, as Congress weighed GSE reform, Brady recognized the weaknesses in the GSEs' oversight and businesses and offered four specific recommendations to remedy them. The companies' regulator must have an explicit primary statutory mission to ensure safety and soundness, it must have sufficient stature to avoid capture by either the GSEs or special interests, the private sector should play a role in assessing the safety and soundness of the GSEs and basic statutory authorities must be consistent across the GSEs.
Unfortunately, a Congress increasingly captured by the GSEs and banking interests brushed Secretary Brady's recommendations aside and, in 1992, passed legislation that placed the GSEs on a slippery downward slope.
In 2008, nearly two decades after Secretary Brady offered a sensible proposal, Congress finally passed legislation to carry out his plans, creating a tough regulatory and capital regime that restricted the GSEs to their core utilitylike business. Unfortunately, two months after the law was signed and before it could be implemented, the financial crisis struck, the GSEs were deemed to have been hobbled by their mortgage holdings and they were placed into conservatorship by their new regulator.
Within a few months, the largest banks and the think tanks they support began to offer plans to replace Fannie and Freddie. These plans are fundamentally unworkable and carry massive costs and risks. Even the Obama Treasury Department has said that such plans will increase the concentration of the $5 trillion mortgage market by the four largest banks.
The Obama administration has proposed a bank-centric plan that, according to Treasury documents, "benefits larger institutions that have better access to funding" and could "lead to increased concentration in the banking sector and higher costs for borrowers served by smaller lenders." If the largest banks get their way, big banks will become even more systemically important and will again become "too big to fail."
Big banks and their supporters in Washington argue that releasing Fannie and Freddie from conservatorship will send them back to the same broken system of oversight and rules that allowed their failures. But an honest review of the historical record through 2008 suggests otherwise. The Federal Housing Finance Agency, armed with the powerful HERA statute, fixed the GSEs' problems with the critical exception of capital. Restoring them as utilities is the way forward.
Gas, sewer, water and electric utilities are all government-sponsored enterprises. Like Fannie and Freddie, they operate in essential industries that serve a public good and in which the cost of their infrastructure is too high to allow competition without supporting uneconomic outcomes – like a dangerous race-to-zero. These private companies operate under strict oversight by independent public utility commissions that regulate allowable rates of return while requiring them to continuously build capital so that they can serve customers in all economic conditions. In good times or bad, citizens can be sure that when they walk into their home and flip on their lights or turn on their faucets, services are working.
The government does not have to provide water and power to constituents; instead it charters private companies as utilities to do so under tight supervision and control. Private investors in these companies get a modest, regulated return in good times and bad, in exchange for leaving permanent capital in place. The same can be said for the secondary mortgage market. The government does not need to provide capital or bear credit risk for all Americans to have access to 30-year mortgages at affordable rates.
If the goal of financial reform is to reduce risks to the public, we should use the time-tested and effective public utility model, rather than gamble on the same "too big to fail" model that brought us to crisis.
Joshua Rosner is managing director at Graham Fisher & Co. He co-wrote the book "
