You can make a convincing argument that nearly any of the acts of cronyism and incompetence of Barack Obama’s presidency have done or will do long-term damage to our nation. Perhaps no decision he made had greater ramifications, however, than the decision to bail out Freddie Mac and Fannie Mae the two mortgage-security enterprises whose gross negligence helped to bring about the collapse of the housing market and the Great Recession.
Putting taxpayers on the hook for the huge number of delinquent subprime mortgages means that the next financial crises could be just around the corner in the event that housing prices again fall off a cliff.
Obama’s toxic legacy continues even after he has blessedly left 1600 Pennsylvania Avenue. That’s because a recent court decision backing the expropriation of Freddie and Fannie in the face of shareholders who want both companies to revert to private ownership.
Obama gave the executive order in 2012 to scoop up both companies’ profits, rather than receive a fixed dividend on the investment, as agreed in the bail-out. The order came at a convenient time, as both entities turned a corner and started delivering a healthy profit. As of 2015, both entities have paid back $30 billion in dividends on top of the money received from the bailouts.
Investors who had put their capital into hedge funds or mutual funds featuring shares of either company are rightfully crying foul that the government has received a return on its investments, but not them. By claiming that the government is overstepping its bounds in taking dividends from the pockets of investors, a lawsuit against the state went as far as federal court.
There, judges ruled that they lack the authority to tell the government they cannot help themselves to the company’s dividends ahead of shareholders (though one judge dissented, wisely claiming that the government had “pole vaulted” over its responsibilities). As such, the decision reinforces the great ugliness of eminent domain, allowing the state to seize assets under the Fifth Amendment and deny rightful owners their fair share anew.
Shares of both Freddie Mac and Fannie Mae grew after Trump’s election (along with nearly every other asset class on the market), a result of optimism that the Trump Administration would provide more returns to shareholders. Steve Mnuchin, Trump’s Secretary of the Treasury, has gone so far as to say that both companies should be re-privatized.
This optimism has fallen flat since the court ruling, however, and shares of both companies have fallen by nearly half since New Years — a report suggested that there was about $300 million in short interest gained by shareholders of both entities in the same time period, meaning that to profit from either company these days requires luck more than investment savvy.
The future of both companies, and thus the future of government-subsidized housing in the United States, is up in the air. Each year the Treasury Department runs down an additional $600 million per year from both companies; by 2018 they will be insolvent.
This will prompt new questions about whether the government could and should bail out the housing market a second time by providing a new lifeline of credit. If Trump decides not to do so, a new housing bubble could burst, potentially costing the country two to four percent of its total GDP. To kick that football down the road anew will require saddling taxpayers with fresh risk to produce their inexpensive mortgages.
President Trump’s housing policy has been an often-ignored part of his agenda, with most headlines coming from his appointment of Dr. Ben Carson as Secretary of Housing and Urban Development. One of Trump’s first executive orders undoing the layers of red tape created by Obama reversed an FHA cut that will result in first-time homeowners saving about $500 on their mortgage payments — a good step considering the poor growth of home ownership in the United States, having falling to its lowest rate in fifty years by the end of 2016.
Without a doubt the biggest step towards better home ownership will be repealing Dodd-Frank, which restricted access to loans and continues to keep thousands of Americans from access to necessary credit. If so, that might be one of the first steps to undoing the damage done by crippling regulations enacted in the wake of the housing crisis.
Regards,
Ethan Warrick
Editor
Wealth Authority
