Created by politicians and bolstered by aggressive lobbying, Fannie Mae and Freddie Mac are quasi-private companies with special access to funds and special regulatory exemptions. With the playing field dramatically tilted in their direction, these morgage-industry behemoths are accumulating ever-larger portfolios. In a genuinely unfettered market, this would be just fine, but this is not the case. Because of their special access to the Treasury, Fannie and Freddie create a heads-they-win-tails-we-lose situation for taxpayers. If Fannie and Freddie prosper, it is the consequence of government favoritism that results in the economy's capital being misallocated. If they fail, there almost surely would be a bailout reminiscent of the S&L fiasco. There has been an effort to slightly curtail the risks caused by the Fannie and Freddie subsidies, but the Wall Street Journal notes that the one decent provision of the bill was removed. Not surprisingly, there is widespread expectation that the White House will approve a bill that actually makes a bad situation even worse:
Their amendment to Mr. Frank's bill, which passed by voice vote Thursday night, guts the one provision that made it worth the effort. What's left is a regulator who would lack the authority to limit the risk that Fannie and Freddie's $1.4 trillion mortgage-backed securities portfolios pose to the financial system, plus a $500 million a year boondoggle that goes by the euphemism "affordable housing fund." ...That leaves the White House and Treasury with some decisions. Administration officials were cautious about the Bean-Neugebauer amendment when first proposed, but Fannie and Freddie's friends are betting the Administration wants a deal enough to accept even a bad one. However, a "reform" that does nothing to reduce the problem of putting so much housing risk into two companies, and which also includes an annual $500 million donation to "housing" activists such as Acorn is worse than the status quo.