I used to have a friend named Jason, who was the human equivalent of the proverbial train wreck. In trying to help him get his life in order, I did what I could to look out for his best interests. I won't go into too much detail on that, but trust me when I say it was more than most friends would do. And, occasionally, I loaned him money to help cover his chronic debts.
I bet you know where this story is heading – indeed, my ROI was nil, because Jason never bothered to pull himself together. Of course, that is why I ‘used to have a friend named Jason.’
I was reminded of Jason when I read about the recent comments by the International Monetary Fund (IMF) on Fannie Mae and Freddie Mac. This comes in view of the crisis facing the global economy, which is being pulled down by the tumult that originated in the collapse of the U.S. housing market. David Hawley, an IMF spokesman, stated the following: ‘The announced measures on Fannie and Freddie are going in the right direction and are consistent with approaches that the fund has supported. We agree that public-sector intervention is warranted, accompanied by improved supervision.’
So where does Jason come in? With the notion of ‘improved supervision.’ As I see it, the problems that bedeviled Fannie and Freddie had absolutely nothing to do with supervision – in their case, the Office of Federal Housing Enterprise Oversight (OFHEO). To be frank, OFHEO and its indefatigable chief, James Lockhart, did everything possible to keep Fannie and Freddie in line.
The problem was actually from Fannie and Freddie, and no one can claim they were the best-run organizations. We can publish long lists of where they seriously erred, ranging from egregious accounting scandals to dubious lobbying largesse to CEO salaries that are actually higher than President Bush's annual take-home pay. The summary is that Fannie and Freddie were not victims of circumstance – they brought their problems on themselves and they did everything they could to elude supervision.
What bothers me about the new Housing and Economic Recovery Act of 2008 is that the federal government is pumping money (and lots of it) into entities that have not truly been reformed. Yes, the new regulatory authority that will replace OFHEO will have the ability to tighten the proverbial reins. Yes, there are new reins, but we still have the same horses!
And, yes, the new law creates a Fannie- and Freddie-financed affordable housing fund, but the government-sponsored enterprises (GSEs) are not realigning their priorities in the direction of affordable housing – and there has been no ringing statement from the management of either GSE that they are suddenly gung-ho to aid the cause of affordable housing.
Even worse, there appears to be no pressure in Washington (from either Congress or the White House) to replace the upper echelon at Fannie and Freddie with new management. If the GSEs are going to start over, let them start over with a fresh new team at the helm.
And the biggest mistake in the new law is not restricting the GSEs' lobbying clout – many Beltway experts blamed the Fannie and Freddie lobbying machines for derailing previous attempts at supervision. This aspect of the GSEs' operations remain intact, and that will come back to haunt the Beltway crowd.
I eventually cut my ties with my irresponsible friend Jason, and I have no idea what became of him. Unfortunately, the industry cannot cut its ties with Fannie and Freddie. However, we have new legislation in place, and we need to give it a chance to take root and blossom. Let's hope that the near future will present us with a Fannie and Freddie who behave in a manner that is totally removed from what we've seen in the recent past.
– Phil Hall, editor, Secondary Marketing Executive.
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
