A publicly traded corporation announces a $2.2 billion quarterly loss, a dividend cut and warns that steeper losses are sure to come. One might expect such a company’s stock to go down on such dire news. But not Fannie Mae! On the very day Fannie revealed nothing but bad performance news to investors, its stock went up 9% to $30.81. How is this possible? We’ll give you a hint: big government market intervention is involved. The New York Times explains: “Their optimism stemmed from the belief that Fannie Mae is in a position to pick and choose among the best and safest loans currently in the marketplace.”

And why is Fannie in position “to pick and choose among the best and safest loans currently in the marketplace”? Because Fannie’s guaranteed access to federal credit and the Federal Reserve’s authority to buy its debt create the industry-wide assumption that Fannie’s debt is federally guaranteed. This advantage allows Fannie to cherry pick the safest loans in the marketplace and is why Fannie and Freddie Mac have a combined 80% share in the market for mortgage reselling industry.

Even with all of these government created advantages (and perhaps because of them) Freddie and Fannie have already lost more than $9 billion in mortgage related transactions, face more than $19 billion in unrealized losses, and have a total subprime exposure 0f $717 billion. Now Congress wans to make the situation even worse. The House is set to pass Rep. Barney Frank’s (D-Mass.) housing bill, which would raise the cap on the size of loans Fannie and Freddie can buy to $730,000. The New York Times writes on the situation today:

Some regulators and lawmakers want them to buy more and riskier loans to jump-start a revival in the housing market. Others worry that if the companies spend too freely, they will suffer even greater losses, which could require a taxpayer-financed bailout. If that were to occur, it could ripple through the entire stock market and economy, creating a crisis of confidence about the trillions in mortgages the company owns and has guaranteed.

The problems with the House’s housing bill do not end there. The centerpiece of the bill allows the Federal Housing Administration (FHA) to guarantee 100% of a troubled loan’s value if the lender first agrees to cut the original value of the loan by 85%. Heritage’s David John identifies many more of the bill’s shortcomings, including:

  • It is essentially a government buyout of problem mortgages disguised as a refinancing plan.
  • It sets an extremely bad precedent, as lenders will quickly request that this guarantee be made available for all loans to borrowers with poor credit histories or lower incomes.
  • The plan would reward speculative borrowers who took out loans they never had a chance of repaying in hopes of flipping a house in a rising market.
  • Even if legislation were passed tomorrow, it is not possible to implement this plan rapidly. It will take a great deal of time to refinance the 1 million to 2 million loans that supporters say could benefit.
  • The estimate for the number of homeowners who could be helped continues to drop. First, supporters claimed that about 2 million homeowners would have loans refinanced. Then, 1 million. Now the CBO says that only 500,000 loans worth about $85 billion would be refinanced over the next four years.

Without risking billions more in taxpayer money, the Treasury Department’s Hope Now program assisted 500,000 homeowners in the first quarter of 2008 alone; the same number of people the CBO estimates the House plan would help over a five-year span. Why should taxpayers have to pay for the $2.7 billion in losses the CBO projects the FHA will suffer from anticipated mortgage defaults or have to risk the trillions of dollars a federal bailout of Freddie and Fannie would cost?

The Politico predicts that “a worried flock of moderate rank-and-file” Republicans will abandon “ideology” to support the Frank plan. Rep. Ginny Brown-Waite (R-Fla.) says she will back the bill because she believes opposition to it “will hurt her party’s image with voter concerned about the economy.” “I’m the compassionate conservative here,” Brown-Waite said. With congressional approval ratings in the low-20s and the House Republicans facing defeat after defeat in special elections, maybe it is time real conservatives stopped worrying about appearances and started voting on principle instead.

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