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.
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.
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.
"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.
Most housing experts agree that saving Fannie and Freddie, like the bailout of the banks, helped stave off complete economic collapse.
Jonathan Miller, CEO and president of the real-estate appraisal firm Miller Samuel, pointed out that Fannie and Freddie, along with the government-controlled Ginne Mae, now account for the insurance of 90 percent of the residential-mortgage market. The private sector has virtually abandoned such mortgages, not only because it was burned by subprime securities but also because of the great uncertainty in housing and politics.
But Miller said the issue of executive pay -- whose structure was determined back in 2009 -- doesn't address the roots of the housing issue: how to bring back private investment and what to ultimately do with Fannie and Freddie.
"It's a sound-bite approach to a complex problem," said Miller. "It makes for good fodder for the evening news, but it doesn't solve the problem."
"Congress is treating Freddie and Fannie like a government agency, when, in fact, it's a corporation," he added.
Freddie was an active political player prior to the collapse and no stranger to controversy. In 2003, it revealed that it had understated earnings by $5 billion, and was later fined $125 million -- a minuscule sum in the context of its holdings, which peaked at over $2 trillion. In 2006, it was fined $3.8 million for illegal campaign contributions, including donations to members of the U.S. House Financial Services Committee, whose decisions can affect Freddie. Perhaps most notoriously, Freddie paid current Republican presidential candidate Newt Gingrich about $1.6 million for consulting fees. Fannie Mae was also an active lobbyist.
But after conservatorship, both companies were banned from lobbying. As part of an agreement with the U.S. Treasury Department, they were also required to pay a 10 percent dividend on preferred shares held by the government, which added to the amount of money it had to draw from taxpayers to remain solvent each quarter.
Despite the turmoil, the two organizations remain a critical part of residential housing market, and of the greater economy. But their future remains clouded, with some politicians calling for their dissolution, a process that would take years. Until then, Fannie and Freddie will remain easy targets for those unsatisfied with the government's housing policy -- although it's debatable whether all criticisms are justified.