Fannie Mae, Freddie Mac: Taxpayers on hook

There are four words one never wants to hear from a friend. And I'm reluctant to use them myself. These four words can come across to the recipient as proud and haughty. At the very best, they can sound indelicate. So it is with great consternation and some reluctance that I open our time together in this space with these very four words: I told you so.

And I did. In this space, and anywhere I could get an audience. Indeed, I told you so. Several times.

For six years, I've worked as a part of an effort to bring some much-needed reforms concerning Government Sponsored Enterprises (GSEs) -- in particular Fannie Mae and Freddie Mac, the giant government-supported private mortgage companies. (The reality of a giant taxpayer-supported private business should raise a red flag itself.)

Over the past six years, as I've talked to Wall Street types, Republican and Democrat members of Congress, and Republican and Democrat administration types, I've heard some pretty interesting things, including:

A: "I like them the way they are," from a Republican congressional leader.

B: "Don't tell me about your efforts -- we make too much money off of them," from a Wall Street firm.

C: "We must terminate our contract with you because we do business with Fannie and Freddie and they will pull their contracts with us if we don't," from a D.C. law firm.

D: Fannie Mae had a black CEO at one time and I was posed the question by a lobbyist, "How could you be involved in bringing another black guy down?"

E: "I would be a part of hurting homeowners and home ownership," from a homebuilders association representative.

Now fast forward with me to three weeks ago -- and the once-implicit guarantee of taxpayer support for these GSEs has now become explicit.

The GSEs and their allies had argued that Fannie and Freddie's debt was not guaranteed by the U.S. Treasury or any agency of the federal government. How wrong they were.

As recently as a month ago, we read headlines in papers all across the country such as "Fannie and Freddie Deflected Risk Warnings," and "Delinquencies Rise at Fannie Mae, Freddie Mac," both from the Washington Post; "Fannie & Freddie: The Muddle-Through Approach," in The Economist; "Fannie Mae and Freddie Mac: Too Fat to Fail" in US News; and many more. The hits (to the taxpayers) just keep on coming.

Because of collected neglect over the past 10 years, taxpayers are going to be at risk for some time due to the lack of oversight of these Government Sponsored Enterprises. It will take us several years to recover.

The president signed legislation three weeks ago that will do what I and several others have been suggesting for years. The GSEs have always been regulated as public housing institutions. They are not public housing institutions -- they are financial institutions and should have sufficient capital on hand to support their risk, just as every bank in the United States is required to have.

In their charter that was drafted by the federal government, they are designated as secondary lenders for home mortgages. That's their sole responsibility. They should not be primary lenders. They should not sell insurance products. They should operate solely within the boundaries of their federal charter to be a secondary mortgage lender. That's it.

Finally, they need a regulator with some bite. Whoa -- a Republican talking about more regulation? Not more regulation, but fair and equitable regulation that watches out for the rights of the taxpaying public -- forcing them to do what the law authorized them to do, and to not overstep their bounds.

If this had happened at any time over the past 10 years, I would not be writing this piece today, and we would not have read the headlines referenced earlier. Ironically, many Republicans neglected that oversight in the name of less regulation and free enterprise, and Democrats neglected tougher oversight in the name of more affordable housing.

In the end, the very people everyone claimed to want to help -- the taxpayers -- are getting stuck with the minimum $25 billion bill.

The president signing this reform bill is just the beginning. Now, watchdogs must make sure the legislation is implemented properly.

As we close this chapter of history and I consider what I've experienced the past few years, I'm reminded of two things:

1: It's always good to go into a legislative fight with the facts.

2: The other side can lie louder, but we can tell the truth longer.

I told you so. Case closed.

J.C. Watts (JCWatts01@jcwatts.com), chairman of J.C. Watts Companies, a business consulting group, is chairman of FM Policy Focus, an association seeking reform of government sponsored enterprises such as Fannie Mae and Freddie Mac. A former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002, he writes a twice-monthly column for the Review-Journal.