Congress Backs Government Subsidy for Fannie Mae, Freddie Mac

WASHINGTON – The House Financial Services Committee approved a new regulatory scheme for the secondary mortgage market, but not before debating the guaranteed line of credit, the so-called federal subsidy, for Fannie Mae and Freddie Mac. Republican Ron Paul of Texas, a self-proclaimed Libertarian, argued that the federal government should not be subsidizing the huge government sponsored enterprises, which it does through the credit line, lowering borrowing costs by as much as 25 basis points on billions of dollars in publicly floated debt. “It’s not necessary to have this subsidy,” said Paul. “It encourages business, lenders and purchasers to do things they wouldn’t do otherwise.” But Massachusetts Democrat Barney Frank, who chairs the Financial Services panel, said he is convinced the two secondary market giants pay back the subsidy by the variety of homeownership programs they operate for low- and moderate-income buyers, as well as a new affordable housing grant program, projected at as much as $500 million a year, that will be required under the proposed bill. Paul’s proposal was defeated. The bill, which now goes to the full House for debate, would also create a new regulator for Fannie, Freddie and the 12 FHLBs; set new capital standards for the housing GSEs; and allow the regulator to order divestiture of some of the huge mortgage portfolios held by Fannie and Freddie if questions of safety and soundness arise. The House passed a similar bill in the last Congress, but it was never voted by the Senate.