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It's been a rough week for Fannie Mae and Freddie Mac.
The mortgage giants have been blasted by both parties in Congress for their executive pay structures, echoing a previous uproar that consumed Wall Street, whose top bankers took home bonuses while receiving billions of dollars from taxpayers.
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But unlike the big banks -- which mostly have paid back their bailout money, with interest -- Fannie and Freddie continue to hemorrhage cash and remain deep in debt. After third-quarter losses of $5.1 billion and $4.4 billion, respectively, Fannie and Freddie have cost taxpayers over $150 billion since 2008 -- by far the largest amount among all companies on the U.S. government dole.
The two outfits have inspired loathing across the political spectrum, with some conservatives blaming the housing crisis on their mandate to expand home ownership and some liberals questioning their continued usefulness.
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With home prices declining and a large number of borrowers still in foreclosure, a group of U.S. senators channeled populist rage against the companies this month, with Sens. John McCain, R-Ariz., and Jay Rockefeller, D-W.Va., sponsoring an amendment that would prohibit bonuses while Fannie and Freddie are still under government conservatorship.
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"It's inexcusable that anyone would think it's okay to hand out these bonuses," Rockefeller said in a statement. "The American people deserve better, and it's time we make sure that Fannie Mae and Freddie Mac act more responsibly with their money."
A Rockefeller representative said the amendment would move forward at the discretion of Senate Majority Leader Harry Reid, D-Nev.
Fannie and Freddie's descent from grace has aligned with the falling home prices and the rising bitterness toward large corporations in the United States during the past few years. But unlike most companies in the financial industry, they are in unique, unenviable positions. The two organizations have always existed in the ambiguous state of "government-sponsored enterprises" or GSEs. They are run like corporations, with boards of directors and exchange-traded shares. But they insure mortgages with the backing -- once more or less implicit, now more or less explicit -- of the U.S. government, which historically has appeared to be prepared to swoop in and rescue them whenever things go awry.
After Lehman Brothers Holdings Inc. collapsed and the housing markets began to unravel, the government did just that, taking over Fannie and Freddie and Fannie by placing them into conservatorships in September 2008. But with salvation came more scrutiny, as elected officials, the press, and the general public wondered what to make of the mortgage companies.
Although the GSEs have been blamed for the housing crisis, they don't actually originate any loans. Rather, Fannie and Freddie buy mortgages from primary lenders and sell them as securities, which allow the original lenders to continue lending. They also guarantee the mortgages, making them responsible for defaults.
Fannie and Freddie have been blamed for the housing collapse, but many experts have said that they were not the main cause. For one thing, the companies began by insuring only conforming mortgages -- those that weren't subprime. As Wall Street feasted on subprime mortgages, such loans boomed from around 2 percent of the market in 1999 to 25 percent in 2005. The GSEs lost market share, until finally joining the subprime game by buying mortgage securities rated AAA.
But after the housing bust, Fannie and Freddie were left holding the bad mortgages, and overall declines in prices meant that even some qualified homeowners also began falling behind on payments. And as the banks recovered, with some posting record profits just a year after the crisis, the GSEs continued to sort through the housing carnage. The vast majority of each company's quarterly losses continue to stem from pre-2009 mortgages that are still winding their way through the foreclosure process, while more recent loans have far stricter underwriting and credit standards.
And although Fannie and Freddie have received large federal cash infusions, the company's shareholders were not spared from the collapse. Private investors -- and many of the two organizations' more than 10,000 employees -- lost nearly all of the value of their shares. The executives of the companies at the time of the collapse also left without any severance packages, and, since entering conservatorship, executive compensation has been decreased by 40 percent at Freddie Mac, according to testimony from CEO Charles Haldeman.
While housing news remains dreary in general, Douglas Duvall, a Freddie Mac representative, noted that Freddie accounts for 22 percent of the entire mortgage market, but that only 3.5 percent of its overall mortgages are seriously delinquent, with payments 90 days late or more. That's better than the overall delinquency rate of 7.75 percent, said Duvall. In addition, Freddie has helped 575,000 homeowners avoid foreclosure since 2008.
