Fannie Mae and Freddie Mac are quasi-private mortgage companies that receive huge implicit subsidies from taxpayers. So it is difficult to know how to react to a deal between the Bush Administration and Congressman Barney Frank (D-MA) that would skim some money from Fannie and Freddie and use the money for so-called affordable housing. The bill would curtail the ability of Fannie and Freddie to use their subsidized status to expand into new markets, which is good. The bill also would make Fannie and Freddie shareholders unhappy, which is good (or at least amusing) since they have been implicitly profiting from government rather than market forces. But the deal also means more money for politicians to redistribute, which is akin to giving an alcholic keys to a liquor store. The Wall Street Journal reviews the good and bad of the deal:
[Rep Frank's] bill would tax Fannie and Freddie to the tune of 1.2 basis points of their total book of business -- or just over 1/100th of 1% of all the mortgages Fannie and Freddie have bought and packaged to sell to investors. That's more than $500 million a year, with potential to grow. The Bush Administration has insisted that the fund be disbursed based on non-political criteria, but, c'mon, this is Washington. While the first year's payout is supposed to go for housing on the Gulf Coast, a honey pot this sweet will soon be passed out based on the interests of the most powerful Members. The larger political danger is that such a fund gives Congress an even greater stake in seeing Fan and Fred grow. The fund amounts to an annual dividend payout to Congress. The Fannie Tax would thus make it even less likely that these "government-sponsored enterprises" (GSEs) will ever be weaned off their implicit taxpayer subsidy and act like normal private companies. Congress could also look at this earmarked tax precedent and try to apply it elsewhere -- say, on the profits of energy companies for a "global warming fund." ...the current meltdown in the subprime and Alt-A mortgage markets has led to calls -- by the same people now dunning Fan and Fred -- for all kinds of new lending oversight, rules and restrictions. Mr. Frank's latest brainstorm is to stick investors in mortgage-backed securities with the losses when subprime borrowers default. It's hard to imagine a measure better designed to cut off credit to those Mr. Frank claims to want to help. If investors don't have legal certainty about the debt they are buying, they won't lend the money.