Early last week, Americans discovered that nearly $13 million in bonuses were paid to 10 executives at the government-owned mortgage giants Fannie Mae and Freddie Mac. Just days before, the two entities had once again reported substantial quarterly losses and asked for another $13.8 billion in federal aid. Given that taxpayers have already provided nearly $170 billion to prop up these government-sponsored enterprises (GSEs), it’s no surprise that there has been public outrage over the hefty bonuses.
Lawmakers of all stripes have led the charge. Sixty senators signed a letter criticizing the bonuses. The House and the Senate pledged to work on legislation to put Fannie and Freddie’s employees on the federal pay scale and prohibit executive bonuses so long as they’re under government tutelage. And next week the GSEs’ regulator, FHFA Director Edward DeMarco, will be called before two congressional panels to answer uncomfortable questions from lawmakers eager to shake their fists and stomp their feet for the C-SPAN cameras.
Ultimately, these lawmakers are right to express their anger. It doesn’t make sense to pay out million-dollar bonuses to executives when a firm is losing money so fast, but it’s especially deplorable to do so when those bonuses come at taxpayers’ expense. The only reason these entities still exist is because of a massive infusion of taxpayer-funded financial support, doled out by officials who believe the GSEs perform an essential public service. You simply can’t have it both ways: These executives can’t work as “public servants” and get paid like Wall Street executives.
However, this outrage over bonuses misses the larger point. The GSEs would still be bankrupt and still be bleeding taxpayer money even if those bonuses had never been paid. The real problem here is the government’s overwhelming dominance in the mortgage market itself. Together the GSEs and the FHA currently originate well over 90 percent of new mortgages in the U.S., primarily because private sector competitors can’t beat the funding advantages and government backing that these entities enjoy. No one believes this dominance is healthy. It needs to end immediately, at the very least because it wastes billions of taxpayers’ dollars each year.
Two serious plans have emerged to bring private capital back into the nation’s housing markets. One, sponsored by Rep. Scott Garrett (R-NJ), would increase transparency, legal certainty and standardization of underwriting criteria in order to entice private investors. Another, sponsored by Sens. Kay Hagan (D-NC) and Bob Corker (R-TN), would establish a covered bond market in the U.S., which has been used for years in Europe to increase liquidity. Their efforts are a welcome contribution towards achieving the goal of a gradual, predictable and complete elimination of government housing subsidies. As Sen. Corker put it, Washington needs “to lay down a marker and get a conversation going that Washington has put off for far too long.”
Unfortunately, until politicians on both sides of the aisle are ready to get serious about winding down market-distorting subsidies from Fannie Mae, Freddie Mac and the FHA, emotional snafus like improper bonus payments are bound to continue. Bad as that is, it’s just a symptom of a larger problem that Washington has so far shown little interest in fixing.
Adam Berkland is a legislative assistant at Americans for Prosperity.