Fannie and Freddie Are Just Government Agencies. They're Likely to Stay That Way.
Last Week, the US Supreme Court confirmed that Fannie Mae and Freddie Mac are essentially government-owned corporations, and are likely to stay that way.
The court didn’t say this in so many words, but the ruling (namely, Collins v. Yellen) helps to end the fiction that Fannie and Freddie are private organizations only temporarily in a state of “conservatorship” under the control of the US government.
Seemingly, the ruling itself is extremely mundane. The court ruled that the chief executive of the Federal Housing and Finance Agency (FHFA)—the government agency that effectively owns Fannie and Freddie—was for all practical purposes a government appointee like any other executive from a government agency. Moreover, the court refused to intervene to end the federal government’s practice of “sweeping” funds from Fannie and Freddie and placing those funds in the US Treasury.
In effect, the rulings confirm what more cynical and savvy observers have long known: that Fannie and Freddie have always been quasi-government organizations, and became full-on government bodies following the bailout and takeover of the two corporations which occurred in September 2008.
In other words, in practice, Fannie and Freddie are no more “private” entities than is Pemex, Mexico’s state-owned petroleum company.
As Lew Rockwell noted at the time of the government’s takeover in 2008:
This past week, the government announced that it would take Freddie Mac and Fannie Mae, the mortgage giants, under conservatorship, which is a nice way of saying that they will be nationalized.
We don't use the word nationalize any more. We can try an experiment and read the new term "conservatorship" back into history. In fact, we might say that Stalin and Lenin put Russia's industries under a kind of conservatorship. Or we might say that Mao pushed a kind of land conservatorship, or that Hitler's policy was one of national conservatorship. Marx's little book could be retitled The Conservatorship Manifesto.
You see, the government keeps having to make up new names for these things because the old policies, which were not that different in content, failed so miserably. The old terms become discredited and new terms become necessary, in an effort to fool the public.
So, although we now politely—nearly thirteen years later—refer to Fannie and Freddie as companies “in conservatorship,” the reality is that these companies have been nationalized.
Of course, they were never truly private. Fannie and Freddie were created by Congress to add liquidity to the mortgage markets by buying up mortgages in the secondary market. For investors, the desirability of their stock to investors long rested on the implicit promise—a de facto wink and nod—that Congress would never allow these companies to fail. Yet not even this was enough for the management at Fannie and Freddie. As early as the late 1990s, Fannie Mae was likely “misstat[ing] its financial statements.” Freddie engaged in similar behavior. None of this affected what many investors were banking on: that in case of any major disruptions to the housing market the federal government would force the taxpayers to bail these companies out.
That’s exactly what happened in 2008—just the latest spasm of “financialization” which sucked ever more resources out of the nonfinancial economy in order to pour more cash into the financial sector.
Yet investors perhaps did not expect the feds to expropriate the companies, although such terms were never used. Both investors and federal regulators have continued to fight over just how fully these companies had been nationalized. Last week’s ruling makes it clear they are indeed truly nationalized, and that the money that flows into Fannie and Freddie is the federal government’s money.
Nor should we expect this to change any time soon. Approximately half of the mortgage market at this point is backed by Fannie and Freddie, and that means the stakes are high. Congress needs Fannie and Freddie to grease the wheels of the mortgage market and to ensure that there is always plenty of money sloshing around in the mortgage markets so that interest rates remain low and the homeownership rate is propped up.
To trust Fannie and Freddie to the “free market” might allow interest rates to adjust to a significantly higher rate, and that’s clearly not tolerable in the current climate in Washington, DC.
It’s clear Washington never intended these companies to be truly private, but the current housing market is so fragile and so reliant on artificial amounts of liquidity—and artificially low interest rates—that it appears clear federal officials will continue to insist on direct control.
It’s all just another example of how the modern US economy is heavily socialized, financialized, subsidized, and controlled by federal technocrats.
The court has just told us what we already knew, but now it’s getting harder for investors to deny this reality. Following the ruling last week, Fannie and Freddie stock plummeted 45 percent at one point, and remains at a multiyear low as investors now increasingly suspect that hopes for “reprivatization” are in vain.