The government-sponsored entities Freddie Mac and Fannie Mae are so neck deep in the subprime housing crisis that now the White House is considering putting them into conservatorship. Despite fears that both companies do not have enough capital to cover their liabilities, the Senate passed a bill yesterday that would take even more money away from Freddie and Fannie. Heritage scholar David John explains in the New York Post:
Monday’s price drop also shows how foolish it is for Congress to rely upon the two to pay for a deeply flawed housing bailout. Both the House and Senate are working on bills that impose a small fee on the mortgages that Fannie and Freddie hold in their investment portfolio. The Senate wants to use the money to refinance about 500,000 bad mortgages into ones with a federal guarantee; the House wants it for low-income housing programs.
Lawmakers were figuring the Freddie/Fannie investors wouldn’t miss the money. But with investor confidence quite shaky after Monday, that looks like a terrible bet.
Instead of relying on those funds, Congress should modernize and strengthen both firms’ regulator. That improved oversight would help to reassure the markets that future housing problems won’t develop into crises that could threaten the viability of either firm or require a massive bailout with taxpayer dollars.