There’s a funny dynamic in the United States when it comes to getting a mortgage: You go to a bank, apply for a loan, and if the bank lends you money, there’s a good chance it happened thanks to one of two quasi-government entities that few Americans seem to really understand.
Those entities—Fannie Mae and Freddie Mac—are behind roughly 90% of the U.S. mortgage market today. They do not make loans themselves. Instead, they buy loans from banks, and either hold onto them or bundle them into securities they guarantee and resell to private investors. It’s a little complicated, but if Fannie and Freddie disappeared tomorrow with no replacement, very few people would be able to get mortgages, and all of those who did would be wealthy with spotless credit scores.
Lots of Americans have heard of Fannie Mae and Freddie Mac, but, according to my informal polls over the past eight years or so, they aren’t really sure what the two entities do. Some people think they are regulators. Some mention the student-loan provider Sallie Mae: Aren’t they, like, related? One person thought they were muppets.
In truth, Fannie and Freddie were created by Congress, but for a long time they were private entities, owned by shareholders, which at the same time had the implicit support of Uncle Sam. The two companies were effectively taken over by Treasury Department in 2008 because they were about to collapse. They received more taxpayer support than any bank, insurer or auto company during the financial crisis, to the tune of $187 billion. I once rattled off that statistic to my father, who had a vague understanding of what Fannie and Freddie do, but he refused to believe me. He insisted AIG had gotten the biggest “bailout,” having read it in the paper or seen it on TV.
Confusion or disinterest about Fannie Mae and Freddie Mac is understandable. There are plenty of other things in life to fill up mental caverns, things that are more interesting and important to normal people than the technicalities of mortgage finance. Unless you went to business school or majored in finance or economics, you’ve probably never been forced to learn anything about them in class, either. And it’s hard to get mad about maybe-government entities you don’t really understand getting a lot of money you haven’t heard about.
But it is worth knowing about Fannie and Freddie, because they are so tightly interwoven into the fabric of the $12 trillion U.S. housing system, and because their time is slowly running out. Under terms of their bailout arrangements, they are supposed to be wound down, which means that Congress will at some point have to decide what to do with them. Free-market advocates argue they should be wiped out and have the private market take over mortgage finance entirely. Homeowner advocates think the government should keep playing an active role in mortgage finance, but that Fannie and Freddie should be restructured to eliminate private shareholders and protect against abuses of the past. Other proposals borrow ideas from both sides.
After years of quietly chugging along, Fannie and Freddie have become newly topical because of a story in the New York Times last weekend. The piece raised eyebrows because it accused the banking industry of trying to steal Fannie and Freddie’s business, and painted a picture of cloaked lobbyists shuffling back and forth from business to government, helping evil bankers in a nefarious plot.
The story was written by reporter/columnist Gretchen Morgenson, a frequent Wall Street critic who co-authored a book about Fannie and Freddie called “Reckless Endangerment.” It had a lot of useful historical information and broad context about the status of the two companies. But a few things struck people in the know as strange:
- Starting with the headline that refers to “Big Banks’ Quiet Campaign to Muscle Out Fannie and Freddie,” the piece refers multiple times to banks wanting to “assume greater control of the mortgage market,” “take over the companies’ business and divide their prized assets,” and “push for access to Fannie and Freddie’s assets and profits.” But it never explains what, exactly, big banks are trying to do. They certainly don’t want to be mortgage insurers because, as the crisis showed, it’s an unenviable position to be in when the mortgage market goes bust. They might want to take over the task of bundling mortgages and passing them onto investors, which would provide additional fee income. But that idea is never clearly explained.
- The article suggests that banks are influencing politicians and regulators on active legislation that could succeed. But by all accounts that is far from true. The Obama administration held a big conference and laid out ideas in 2011. Two senators proposed a bill in 2013 that failed. One of the senators, Bob Corker, is still making noise about the proposal, but there is no sign that Congress is taking up the issue imminently.
- The story lists meetings between bank industry executives and government officials, and implies that bankers tried to influence government officials in some unethical or improper way. But it has no information about what was said inside the meetings. It also points out that meetings like this are pretty routine. In fact, even though the Times FOIAed the information, other federal agencies list these types of meetings on their web sites.
- The story details the résumés of three men—David Stevens, Michael Berman and Jim Parrott—showing that they have hopped between jobs in the mortgage industry and in government. It quotes a law professor saying he believes they violated a conflicts-of-interest law. It quotes Stevens and his lawyer saying that’s not true. It does not say with any specificity how the law might have been broken.
The article was confusing for a variety of reasons, the chief one being that there is not a snowball’s chance in hell that Congress is taking up the issue of Fannie and Freddie anytime soon. If the point is that there is a revolving door in Washington and that is a Bad Thing, that argument could be applied to a wide range of people beyond Stevens, Berman and Parrott, so it’s hard to tell why they are highlighted as particularly bad actors. As Jared Bernstein points out, it’s not even clear what bad acts the Times is accusing them of doing.
In truth, even though the Times detailed previously unreported meetings and made all sorts of accusations, the real story is hiding in plain sight: The country’s housing finance system is flawed, as evidenced by what has happened to Fannie and Freddie, but the government hasn’t fixed it because lawmakers are afraid of disrupting the housing market. Few politicians want to upset homeowner constituents ahead of a major election.
It’s great that the Times decided to do a big splashy story on Fannie and Freddie, because the topic is generally undercovered in the press. It would also be great for more people to understand what the two companies do. That way, when the boringly complex topic of mortgage finance does come up for a debate in Congress, taxpayers will have informed opinions about how their legislators ought to vote, and what the consequences will be. I would have cheered if the paper had uncovered some kind of wrongdoing or waste or illegal activity. But I’m disappointed in the article because, frankly, it used a lot of innuendo and fiery words to present accusations with no apparent substance beneath them. At best, it was weird. At worst, it confused and misrepresented an important topic that a lot of readers already don’t understand very well, which may make it even more difficult for them to understand it or care about it later.
I oversee Fusion's money section and have spent most of my time as a journalist writing about banks and finance. I live in Brooklyn with my partner Geoffrey & our two dogs, Captain & Tallulah. Favs: leopard print, Diet Coke, gummy candy, Ireland.