"If the government wants to explicitly guarantee these $5.5 trillion in obligations, then lawmakers should feel comfortable putting them on-budget. Add them to the national debt until the mortgages are paid back in full, or admit that taxpayers cannot withstand the burden and close Fannie and Freddie down permanently."—ALG President Bill Wilson.
August 17th, 2010, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today warned against an explicit guarantee for government-owned mortgage giants Fannie Mae and Freddie Mac, which own or guarantee $5.5 trillion in mortgages, as "a foolish mistake that will only compound what has been the unmitigated disaster of government running the mortgage industry."
"The American people have already seen what the government's implicit guarantee of Fannie-Freddie securities caused over the past three years, which was a lack of risk aversion on the part of lenders and borrowers. Investors may want to take bets without having to be exposed to any downside risk, but that's how we got into this mess. Let's not repeat the same mistakes," Wilson said.
Today, at a Treasury-hosted conference by financial industry leaders, Treasury Secretary Timothy Geithner said "I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns."
Wilson called Geithner's stand "an about-face."
That is because the Treasury Secretary's statement today differed significantly from prior statements. In March he wrote to Congressman Scott Garrett that "By statute, all obligations and securities issued by the GSEs must include a statement that makes clear that such obligations and securities are not guaranteed by the United States and do not constitute a debt or obligation of the United States."
Addressing the financial industry as recently as August 2nd, Geithner in a recent speech at NYU said not to anticipate "the false expectation that the government will be there in the future to rescue you."
Wilson said "Government guarantees are not a false expectation at all, and now Geithner is out calling for an explicit one for virtually every mortgage in the country with the full faith and credit of the U.S."
Wilson pointed to a new forensic study into the root, government causes of the financial crisis by former chief credit officer of Fannie Mae, Edward Pinto, as "yet more evidence of government's complicity in the financial crisis, the Pinto study proves that government forced loose lending on the mortgage industry, weakened down payments and underwriting standards, and overleveraged Fannie and Freddie, all in pursuit of a misguided social policy to expand 'affordable housing'."
"Pinto has done the American people a great service in producing this volume, which is required reading for all lawmakers that wish to address the true causes of the financial crisis," Wilson declared.
Wilson concluded, "Taxpayers cannot afford to double down on government's catastrophic gamble into the mortgage market with an explicit guarantee of more losses. This will only place more pressure on the taxpayers and the national debt. If the government wants to explicitly guarantee these $5.5 trillion in obligations, then lawmakers should feel comfortable putting them on-budget. Add them to the national debt until the mortgages are paid back in full, or admit that taxpayers cannot withstand the burden and close Fannie and Freddie down permanently."
"Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study," By Edward Pinto, August 14th, 2010.