Reforming the GSEs: ‘The Obamacare of Real Estate’

James K. Glassman, a visiting fellow at the American Enterprise Institute, took a swing at the newly proposed Johnson-Crapo plan to reform Fannie Mae and Freddie Mac, in an article titled “The Obamacare of Real Estate,” calling the latest plan to reform the GSEs “disturbingly similar to Obamacare.”

Writing in the conservative Weekly Standard, Glassman said: “Top Senate Banking Committee members released plans this week to wind down mortgage giants Fannie Mae and Freddie Mac and replace them with a complicated apparatus disturbingly similar to Obamacare.”

Earlier this week, the Senate committee chairman, Tim  Johnson, a Democrat from South Dakota, and Mike Crapo of Idaho, the ranking Republican, released a plan to get rid of the two government-sponsored enterprises (GSEs) that provide mortgage financing to most American homebuyers and replace them with a system of private lending explicitly backed by the federal government.

Glassman sees several problems with the Johnson-Crapo plan. One is financial risk for the federal government.

“The legislation would also add $5 trillion to the liabilities side of the federal balance sheet and tempt ratings agencies to demote  government bonds again,” writes Glassman. “And, in defiance of the rule of law, the senators blithely strip shareholders of all their assets in two major businesses. This is behavior you expect in  Venezuela, not in the United States, and it will certainly lead to an erosion of investor confidence.”

Glassman also perceives a double-standard in the newly proposed GSE reform outline.

“Citigroup, AIG, and other recipients of bailout funding paid  back what they owed, and those companies still exist — and, in most cases, thrive — with private capital provided by large and small shareholders and lenders,” he writes. “Fannie and Freddie, on the other hand, are zombies, stripped of their capital, with shareholders hanging on in hopes that the feds will come to their senses and abide by the rule of law.”

Glassman also worries that the GSEs are political footballs.

“In recent decades, the GSEs were tightly connected to the Democratic political establishment and reveled in throwing their weight around. Now, conservatives want to see Fan and Fred get their comeuppance. A Wall Street Journal editorial even claimed that the GSEs should keep paying in penance for creating the financial crisis and for “the election of Barack Obama.”

Glassman concludes by warning that investors in Fannie and Freddie stock will be wiped out by the newly proposed Johnson-Crapo plan.

“What is unacceptable is for the federal government to thumb its nose at the rule of law and treat shareholders with contempt — which is precisely the approach that the new Senate legislation will enshrine in law.”

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