Fannie Mae and Freddie Mac Subsidies Distort the Housing Market
House Financial Services Committee
Congressional Record—U.S. House of Representatives
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 overinvestment
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.
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