The Four Key Things Every Taxpayer Needs to Know About Fannie and Freddie

Five years ago, Congress used nearly $200 billion to bail out the housing finance companies Fannie Mae and Freddie Mac. These companies are still operating under the direct control of the federal government, and taxpayers are underwriting an even larger share of mortgages now than in 2008. Here are four key facts that every taxpayer should know:

1. You are probably responsible for your neighbors’ mortgage payments. Nearly all new residential mortgages are currently being guaranteed by Fannie or Freddie because these companies buy mortgages from banks and then sell investments backed by the mortgages. And because the Federal government guarantees these investments, taxpayers foot the bill when people default on their mortgages.
2. The federal government has encouraged people to buy home mortgages through Fannie and Freddie, but the U.S. homeownership rate is almost identical to what it was before this system was in place. So taxpayers have taken on enormous amounts of debt, and they’ve been forced to back up trillions of dollars in Fannie and Freddie’s securities—with nothing to show for it.
3. A comparison of the U.S. homeownership rate with that of Western European countries shows we’re right in the middle of most developed nations—even Portugal has a higher rate of ownership than the U.S. But when comparing the same nations’ mortgage interest rates, U.S. borrowers pay a great deal more than most. In other words, the U.S. does more to promote homeownership than most countries, but we’ve barely increased ownership, and total costs of owning a home have spiked.
4. Under the guise of helping low-income homeowners, Fannie and Freddie’s shareholders have received billions in annual subsidies. The truth is that these companies were designed to help private investors at the expense of U.S. taxpayers. Shareholders received all the profits from government-backed securities while taxpayers were forced to share the risk.

Fannie Mae and Freddie Mac have to be eliminated because their guarantees distort housing prices and raise the cost of homeownership. Private companies have expressed a willingness to take over the GSEs’ mortgage insurance function; Congress should let them do so.