Friday, 21 Dec 2012

The American home mortgage market has, for all practical purposes, become nationalized since the 2008 financial meltdown, according to an analysis by ProPublica, the non-profit investigative journalism project.

The takeover, without which the housing market could barely function, has occurred against a backdrop of little planning or public discussion.

In fact, nine out of every 10 new mortgages are now backed by the U.S. taxpayer, up from three in 10 in 2006.

“It is creeping nationalism,” said Jim Millstein, an investment banker and former Treasury official in the Obama administration.

Fannie Mae and Freddie Mac, the taxpayer-supported housing giants, alone guaranteed 69 percent of new mortgages in the first nine months of 2012.

The federal government has put $187.5 billion into Fannie Mae and Freddie Mac since the financial crisis, and many observers expect heavy eventual taxpayer losses from that investment.

Both Fannie Mae and Freddie Mac exist today in a “limbo state” under government conservatorship. They are neither private entities nor arms of government policy.

Prior to the meltdown, both companies were heavy political contributors to Democrats and Republicans in Washington. Some of their top officials were former members of various White House administrations.

ProPublica said that under conservatorship, Congress has utilized some of the organizations’ revenues for unrelated government purposes.

“Loathe to raise taxes and eager to cut them, Congress has used Fannie and Freddie as a private kitty, raiding them for cash,” ProPublica’s Jesse Eisinger wrote, noting that Congress “siphoned off” the companies’ guarantee fees to pay for a cut in the payroll tax, and the House passed an immigration bills likewise funded by the guarantees.

Current sentiment in Washington and the private sector is coalescing around the notion of restoring Fannie and Freddie much as they were before the crisis, according to ProPublica, though without significant protections for taxpayers and with measures to attract private capital into the market.

David Scharfstein, a Harvard professor and former Obama Treasury official, said taxpayers should beware, as private for-profit entities would be tempted to lobby for reducing their capital reserves and fees so taxpayers would again be left holding the bag.

“It should be a private market or the government,” he said. “But the government backstopping government entities is the worst possible combination.”

Fannie and Freddie may have suffered more than $3 billion in losses due to the manipulation of the benchmark London Interbank Offer Rate, according to an internal memo by a federal watchdog obtained by Reuters.

Editor's Note: Make 2013 the Year You Pay Zero Taxes

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