Johnson-Crapo Is Fannie and Freddie on Steroids

by John Berlau on May 15, 2014

This appeared here and I wish to thank John for allowing me to publish his work. RK

Today, after delays and much opposition from many quarters on different grounds, the Johnson-Crapo housing finance overhaul is set to be voted on by the Senate Banking Committee. If it clears, the vote will likely be narrow.

The Competitive Enterprise Institute coordinated a letter opposing the legislation signed by 26 leaders of conservative and free-market groups. Here are four key reasons to why Johnson-Crapo, named for Senate Banking Chairman Tim Johnson (D-S.D.) and and Ranking Member Mike Crapo (R-Idaho), is such a monstrosity.

1.       The bill proposes to create a new federal mortgage company would assume all of the current liabilities of the government-sponsored enterprises Fannie Mae and Freddie Mac. That’s $5 trillion added to our deficit right off the bat. It creates huge new risk for taxpayers by doing this, and by putting taxpayers on the hook for 90 percent of losses from mortgage instruments insured by the new Federal Mortgage Insurance Corporation (Feddie Mic).

2.      The bill violates shareholder rights and the Constitution by codifying an Obama administration policy to empower the U.S. Government to sweep all of the profits of Fannie and Freddie into the Treasury in perpetuity — even after the taxpayers have been paid back.

3.      The bill creates new housing “trust funds”, and has very little safeguards to keep those funds from being diverted for political purposes. Recall that ACORN misused housing funds for political activity before it was eventually folded due to multiple scandals. This is a real risk.

4.      From my recent piece at National Review:

After years of minimizing the role Fannie and Freddie played in the crisis, many liberals as well as longtime housing “subsidy suckers” (in the parlance of the intrepid Washington Examiner columnist Timothy P. Carney) in the real-estate and construction industries are hailing the Johnson-Crapo “reform” and saying the GSE model has “failed.” But it’s important to understand why they believe it has failed. Incredible as it may seem, they believe the GSEs are being too stingy and see Johnson-Crapo’s proposed Feddie Mic as a way of prying open government-backed credit spigots even further.

Then there is the opportunity cost to the U.S. economy of the Senate Banking Committee wasting its time on Johnson-Crapo, and not pursuing constructive legislation such as bipartisan relief from Dodd-Frank that has cleared the House and the House Financial Services Committee. And it has been reported that right after they deal with Johnson-Crapo, Johnson and Crapo will turn to rubber stamping reauthorization of the Export-Import Bank, another boondoggle for big business.

Johnson and Crapo should either change course, or change the name of their committee to the Senate Corporate Welfare Committee.