Today the Congress is preparing to vote on a massive mega-billion dollar "bail out" of Freddie Mac and Fannie Mae" – along with billions of other "gifts" to those impacted negatively by the mortgage crisis ("gift" – paid for with our tax dollars). Congressman Ed Royce (R-Orange County) just sent over this well written piece on this ill-advised legislation:

Socializing Risk While Funding the Left
By U.S. Represenative Ed Royce
 
Today the House of Representatives passed one of the largest taxpayer bailouts in decades.  After advocating for strong GSE reforms for the better part of a decade, I am appalled to see this effort dedicated to taxpayer funded giveaways to radical organizations like ACORN and improperly funded liabilities that will cost the taxpayers billions of dollars.  Because I believe good governance and protecting the American taxpayer must trump rewarding radical organizations and imprudent lenders and speculators I opposed this legislation.

For far too long, Fannie Mae and Freddie Mac (the largest Government Sponsored Enterprises) have reaped the rewards of the private sector while enjoying the type of security known only to branches of the federal government.  Their quasi-governmental status has created a level of moral hazard unseen anywhere else in our capital markets.  Insulated from the market forces necessary to quell excessive risk taking, over the years these companies ballooned into the financial goliaths they are today with more than $5 trillion worth of exposure to the mortgage market.  

In an effort to create a regulator with enough authority to restrain these institutions, in 2003 I introduced the first legislation which sought to put Fannie, Freddie and the Federal Home Loan Bank System under one strong regulator within the federal government.  Additionally, in 2005, I offered an amendment on the floor of the House of Representatives to give the new regulator the authority to review and adjust the GSEs’ portfolios to mitigate against a potential systemic shock. The same organizations which stand to benefit from today’s legislation lobbied against and helped defeat that amendment.

As the systemic risk posed by the GSEs grew, the need for a strong regulator able to control their risk exposure and ensure they were adequately capitalized became even more critical, especially as the mortgage industry began to deteriorate over the past 18 months.  The failure of Congress to pass such critical legislation over the years could end up being one of Washington’s greatest oversights in recent history.  Worse yet, today Congress asked (as we so often do) the American taxpayer to pay for past failures.

This legislation has been loaded with handouts and improperly funded liabilities; the most obvious of which bails out speculators and investors that incorrectly gambled on the housing industry and the institutions that provided their loans.  The misguided plan allows banks to dump up to $300 billion worth of their riskiest mortgages onto the back of a New Deal inspired agency – the Federal Housing Administration.  By taking on these mortgages, we are shifting that default risk currently held by institutions and investors around the world onto the backs of the American taxpayers.  A recent projection issued by the Congressional Budget Office estimated that a stunning 35 percent of all of the loans refinanced through mortgage bailout may eventually default on the federal government, which could mean tens of billions in unaccounted for losses.

Perhaps less obvious than the $300 billion bailout, but in many respects more egregious, is an affordable housing fund which would funnel as much as $600 million every year to activist organizations under the guise of promoting affordable housing.  This plan takes a percentage the GSEs’ total new business and redistributes it to groups like ACORN and La Raza with lengthy histories of both voter fraud and anti-free market advocacy at the local, state, and national levels.  So while the chance of a government bailout of these two struggling institutions remains a real threat, we will begin levying a tax dedicated to fund these groups.  And what would be the penalty should one of these organizations be found to have misused the taxpayer funds? Today’s legislation would simply require repayment of the misused funds and anything left from the initial grant.  Additionally, there is nothing to prevent these groups from going back the very next year to receive additional money from this slush fund.  Regardless of where the taxpayer money actually goes, because it is fungible, the government is subsidizing all of these groups’ activities whether we intend to or not.  

Another ill-effect of this legislation is the damage it will have on the progress currently being made through the Hope Now Alliance.  Industry leaders, representing almost two-thirds of the mortgage sector, are stepping forward to address the mortgages most likely headed toward foreclosure.   Because of the significant costs associated with a foreclosed property, a great number of servicers, lenders and borrowers have an incentive to restructure these troubled mortgages which have been weighing on our capital markets and the broader economy.  The rate of workouts through the Alliance has now increased to about 2 million per year. These workouts allow the borrowers to stay in the home and help ease the burden these pending foreclosures have had on our capital markets.  When the lending institutions and borrowers see what the $300 billion bailout would do for them, they will surely step away from the negotiating table in order to receive a much sweeter deal provided at the taxpayers’ expense.   

Earlier today I encouraged my colleagues in Congress to join me in opposing this legislation because of the unprecedented amount of taxpayer liabilities included in this package.  This legislation is an affront to good governance and it should be avoided at all costs.

This entry was posted on Wednesday, July 23rd, 2008 at 12:00 am and is filed under Blog Posts.