GOP PLAN TO TAX YOU OUT OF HOUSE & HOME
By Chuck Muth (10/30/05)
We interrupt our regularly-scheduled red-meat coverage of Supreme Court nominations, politically-inspired indictments, amnesty for illegal aliens and pork-barrel spending to bring you a discussion about...GSEs.
Wait! Don't touch that dial. Before your eyes glaze over, know that today's topic, while not "sexy," is critically important to those of you who might want to buy a house in the post-Greenspan era - complete with another example of Republicans in Congress wandering off the conservative reservation.
First, what the dickens is a "GSE," you might ask? Well, it stands for "Government-Sponsored Enterprise," which also will likely mean absolutely nothing to you. On the other hand, you probably HAVE heard of the two major GSEs: Fannie Mae and Freddie Mac. Then again, you likely still have no idea what the heck Fannie Mae and Freddie Mac are or do either. Nevertheless, they are key to our economy, so bear with me as I attempt to explain this in Forrest Gump-like terms.
Let's say a local bank has $1 million available to lend for the purpose of buying new homes. And let's say, just for argument's sake, it's still possible to buy a decent family home for $100,000. I know, I know. In some markets, $100,00 would barely cover the down payment. But let's pretend.
Under such circumstances, your local bank could make ten home loans of $100,000 each with its $1 million. Now, unless the bank comes up with some new lending money in excess of its original $1 million, they're tapped out as far as home loans are concerned until one or more of those ten initial loans are paid off. This, in essence, takes the local bank out of the home lending market for the next several years. That means if you were #11 on the home loan list, you could be out of luck buying a home for a long, long time.
With an eye on alleviating that problem, combined with the Jeffersonian notion that the nation would be stronger if more citizens owned their own homes, Congress in the early 1900s created the "government-sponsored enterprise" known popularly as Fannie Mae (short for Federal National Mortgage Association). Fannie Mae - and its sibling, Freddie Mac (Federal Home Loan Mortgage Corp.), created in 1970 - are private companies which do NOT get direct money from taxpayers, but which DO enjoy some favorable treatment by the federal government in return for making home ownership more available to more Americans.
The essence of these GSEs is this: They don't lend money directly to you, the home-buyer. Instead, once a bank lends you the $100,000 to buy your house, Fannie and/or Freddie buy your new mortgage from the bank. This is what is called the "secondary mortgage market," and it immediately frees up that $100,000 lent to you for the bank to lend to another potential home buyer. This is an extraordinary benefit if you were #11 on the bank's lending list.
But Fannie and Freddie have been extremely beneficial to home ownership in more ways than by simply making it possible for local banks to offer more home loans.
First, GSEs are restricted to buying residential, not commercial mortgages. And their charter limits them to mortgages of around $350,000 or less. Their purpose, then, is to help moderate- and low-income families obtain the American dream of home ownership. They are not in the market of financing Hollywood mansions for Barbra Streisand and George Clooney. Fannie and Freddie's focus is on Main Street, U.S.A., and John Q. Public.
And for you young 'uns, a little historical lesson and perspective. In the "old days," before Freddie Mac, the 30-year fixed mortgage was almost unheard of in the home-lending market. Today, somewhere around 70 and 80 percent of such home mortgages are issued under such terms. The 30-year mortgage, combined with relatively stable and lower interest rates, have made monthly home-loan payments affordable for millions of average-income citizens who otherwise would still be renting instead of buying.
Then there's the ability to sell your home and pay off your loan early without paying a hefty penalty. While taken for granted today, in the "old days" prepayment penalties were extremely high. Fannie and Freddie's no pre-payment penalty loans have made it possible for you to buy a home, keep it for a few years, build up some equity, sell it for a profit without a pre-payment penalty, and buy another home. A bigger home. A newer home. Or a home in a different neighborhood, city, or state.
This mobility, among other things, allows people who live in high-tax/job-killing/big-government "blue" states such as Taxachussetts to more easily sell the house, pick up and move the family to a low-tax/job-creating/limited government "red" state such as Nevada. But I digress.
Again acknowledging that this is a VERY simplistic explanation of the GSE lending market, once Fannie or Freddie buys your mortgage from the local bank, they generally do one of two things with it: They turn around and sell it to investors (often overseas investors who see the U.S. real estate market as a safe bet and want a piece of the action), or they retain the mortgage in their own portfolio, allowing Fannie and Freddie share-holders and investors to reap the profits from the interest you pay on your home loan.
And there's the rub.
It seems Fannie and Freddie have had some accounting problems in recent years. Freddie's problem is that it turned out they UNDER-stated their earnings from its operations. As accounting problems go, if you're going to have one, THAT'S the one you want. As opposed to Fannie, which - under the leadership of Franklin Raines (a former Clinton official; go figure), OVER-stated its earnings to shareholders by a whopping $11 billion. We'll take conservative estimates over exaggerated claims any day of the week.
Still, as government-favored operations, Congress clearly has a responsibility and legitimate right under the circumstances to inject some additional oversight and regulation into the operations of Fannie and Freddie. But as Congress is wont to do, some are now trying to apply a tourniquet where a band-aid is called for.
What's disheartening is that it's Republicans who are leading the charge to overreact to the GSE situation. Some aren't satisfied with keeping a sharper eye on Freddie and Fannie's accounting. Instead, they want to FORCE Freddie and Fannie to sell off a substantial number of the profitable mortgages they're holding in their portfolios. Rather than merely assuring accurate accounting, these members of Congress are considering an active role in actually manipulating the market and picking new winners and losers.
And to add insult to injury, the normally conservative House Republican Study Committee (RSC) recently proposed socking the portfolios with a new $2 BILLION tax (they call it a "fee") on Freddie and Fannie's portfolios in order to pay for hurricane relief. What's amazing is that the conservative RSC, which should KNOW better, doesn't seem to think this enormous new tax will be passed on to you and I, the consumer; that this new tax won't somehow find itself being added to your suddenly-higher monthly home mortgage payment.
Now, there IS a free-market argument to be made as to whether or not Fannie Mae and Freddie Mac should be privatized completely. It's pretty much the same argument which can be made about the post office; one which I've made myself on many an occasion. But that's NOT what we're talking about today. None of the "reform" measures currently being considered would privatize Freddie and Fannie. What's being contemplated today is taking an enormously successful program - one which has made affordable home ownership possible for millions of average Americans from sea to shining sea - and not only putting it in a straight-jacket, but stripping it bare and taxing the tar out of it, as well. Lovely.
If there's one thing Congress is consistently good at, it's screwing things up. They never seem to learn the lesson that if something works, don't fix it. If only Congress would adopt the medical community's philosophy of, "First, do no harm." But no. While there is indeed need for moderate GSE reform, some Republicans are preparing for radical surgery. The result isn't likely to be pretty and could end up killing the patient. And you and I are going to pay for it through the nose.
Thanks, Congress. We now return you to our regularly scheduled program...
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