A Project of The Annenberg Public Policy Center

Obamacare for the Mortgage Industry?


A slate of new ads from the 60 Plus Association evoke a well-worn conservative punching bag — “Obamacare” — to attack seven senators for supporting a lesser-known plan to overhaul the housing finance market. But the group stretches the analogy to absurd lengths to make the case that a Senate proposal amounts to a “takeover of the mortgage industry.”

In fact, the bipartisan legislation in question is an attempt to roll back the government’s involvement in the insurance industry.

The ads also overplay an emotional appeal, warning that under the mortgage proposal “ordinary investors – teachers, police officers, firefighters – could lose retirement savings.” It’s true that many large state pension funds lost millions invested in the mortgage finance giants Fannie Mae and Freddie Mac stock after those stocks tanked and then fell further after the companies were put in government conservatorship in 2008. But those losses were written off by the nation’s largest pension funds years ago, and represented only a tiny fraction of the pension fund investments at the time. In other words, public pensions are not in serious jeopardy due to the proposed law.

The ads also claim “the federal government will seize all profits” from Fannie and Freddie. It’s true that the government is currently absorbing all Fannie and Freddie profits, and the proposed bill says that arrangement “shall not be amended, restated, or otherwise changed.” But the bill’s authors say the federal courts will ultimately decide whether private investors will see some of those profits, too.

The $1.6 million TV and radio ad campaign from the 60 Plus Association, a self-styled conservative alternative to the AARP that has received millions in funding from organizations connected to the Koch brothers, targets Democrats and Republicans alike who supported a Senate bill that would wind down mortgage finance giants Fannie and Freddie. The targeted senators: Democrats Joe Manchin, Mark Warner and Kay Hagan, and Republicans Mike Crapo, Dean Heller, Jerry Moran and Mark Kirk.

Here’s the text of the ad running against Kay Hagan; other ads substitute the names of the other senators listed above:

Narrator: First it was Obamacare. Millions of Americans saw their health plans canceled. Now Kay Hagan is teaming up with Barack Obama to take over the mortgage industry. Millions of Americans invested their pension and retirement funds in mortgage companies, Fannie Mae and Freddie Mac. Under the plan supported by Hagan and Obama, ordinary investors – teachers, police officers, firefighters – could lose retirement savings. The federal government will seize all profits. Tell Hagan: Don’t bring Obamacare to the mortgage industry.

By way of background, Fannie Mae and Freddie Mac are government-sponsored entities that buy home loans from lenders and sell them to investors, who are guaranteed by the government to be repaid. The two entities ran into trouble after the housing bubble burst and it was discovered they had underwritten too many risky home mortgages to buyers who were unable to repay them. In September 2008, the U.S. government took over Fannie Mae and Freddie Mac, putting them into a conservatorship overseen by the Federal Housing Finance Agency. The government took ownership of 80 percent of their stock and infused $187 billion of taxpayer money to keep them afloat.

At issue in the ad campaign is a bipartisan effort to restructure the housing finance market and wind down Fannie and Freddie. The latest version of that plan was unveiled by Senate Banking Committee Chairman Tim Johnson and the panel’s top Republican, Mike Crapo, on March 16. It expands on a similar bipartisan proposal introduced last year by Sens. Bob Corker and Mark Warner and co-sponsored by many of the senators targeted in the ads.

The latest plan, supported by the White House, would replace Fannie Mae and Freddie Mac with a new agency, the Federal Mortgage Insurance Corp. The idea is for the FMIC to function similarly to the Federal Deposit Insurance Corp., with the new agency acting as a backstop guaranteeing mortgages, but requiring that the first 10 percent of losses is absorbed by private capital.

Does that amount to a government “takeover” of the mortgage industry? Not compared to the way things work today.

As Politico put it in an article cited in small print in the ad, the Johnson/Crapo plan “represents a centrist approach in which the government will still play a role in supporting the mortgage market but less of one than it does today.”

David Stevens, president and chief executive officer of the Mortgage Bankers Association, told us in a phone interview: “It’s a very conservative proposal with extraordinary capital requirements that puts a huge buffer” between government guarantees and private capital.

Added Kevin Hall, a spokesman for Sen. Warner, in an email to us: “Since 2008, taxpayers have had to contribute $180 billion to keep Fannie and Freddie afloat. In the event of another crisis, this proposal ensures that private capital will absorb significant initial losses before the taxpayers are asked to pay for another bailout.”

Between the conservatorship of Fannie and Freddie and home loans insured by federal agencies, the government has, in recent years, backed about 90 percent of all new mortgage loans. As a result, it’s “hardly honest” to call the Senate bill a government takeover the mortgage industry, Jeb Mason, a Treasury policy adviser in the Bush administration, told the Wall Street Journal.

“The point of reform would be to try to bring private capital back into the mortgage industry, not the opposite,” said Mason, who is now a partner at Cypress Group, a financial-services consultancy.

We agree. Under the Senate plan, the private sector will play a larger role in the mortgage market, absorbing the first 10 percent of losses. To call that a “takeover” of the mortgage industry akin to the Affordable Care Act is a huge stretch.

Destroying Firefighter, Police and Teacher Pensions?

To get to the bottom of the 60 Plus ads’ claims that under the senators’ plan “teachers, police officers, firefighters – could lose retirement savings” and that the “federal government will seize all profits,” we’ll have to wade a bit deeper into the mortgage industry weeds.

As we stated earlier, the federal government placed Fannie and Freddie into a conservatorship and sank $187 billion of taxpayer money into the companies to keep them afloat. In return, the Washington Post explained, the companies issued “senior preferred” shares to the government that paid a 10 percent dividend, and the government also acquired rights to 80 percent of the companies’ common shares. With the companies losing money, the government in 2012 required that all profits be sent to the Treasury in the form of dividends. Now, Fannie and Freddie are turning a profit — so much so that they have repaid the $187 billion, and then some. But as long as the companies remain in conservatorship,  profits are continuing to go to the government.

One of several lawsuits filed in the U.S. Court of Federal Claims on behalf of Fannie and Freddie shareholders claims the government takeover in 2008 “while beneficial to the economic welfare of the nation, destroyed the value of Fannie Mae’s and Freddie Mac’s common and preferred stock and trampled the private ownership rights” of shareholders, Bloomberg reported. The 60 Plus Association wants the legislation to compensate investors, but the senators want that to be decided by the courts.

In a press release announcing the ad campaign, 60 Plus Chairman Jim Martin said, “Millions of retirees and other Americans will lose their savings from this broad government overreach built into the Johnson-Crapo legislation. We’re asking these Senators to not bring Obamacare to the mortgage industry and to allow Fannie and Freddie shareholders to recoup the investments that are lawfully theirs.”

But are the retirement savings of firefighters, police officers and teachers really in such grave danger? Not really.

As backup for its claim, a spokesman for 60 Plus directed us to a 2008 article in the Wall Street Journal that reported some of the largest public pension funds — including those for public employees in California, New York and Florida — held millions of shares of Fannie Mae and Freddie Mac. The article noted, for example, that the Florida Retirement System pension fund, one of the largest pension funds in the country, held nearly 4 million shares of Fannie and Freddie in 2008, and that the stock’s plummet had resulted in $214 million in unrealized loss. But by way of context, the Florida pension’s investment portfolio at the time was valued at $124 billion. So the losses amounted to a little less than 0.2 percent of its asset value that year.

The Florida Retirement System has since dumped all of its Fannie and Freddie stock, a spokesman for the pension fund told us. In other words, those losses were long ago written off. As of the end of last year, the Florida pension fund held a higher level of assets than ever before in its history.

Keith Brainard, a research director for the National Association of State Retirement Administrators, told us via email that “speculative investors” – not public pension funds – have more to gain from the lawsuits that seek a share of Freddie and Fannie’s recent profits.

“Holdings in Fannie Mae and Freddie Mac comprised a very small portion of public pension funds’ portfolios,” he said. “Although the precipitous decline in the value of these companies was surely disruptive to those companies and perhaps to some of their shareholders, the effect of their decline on public pension funds did not come close to endangering the ability of public pension funds to pay the retirement benefits of retired state and local government workers.”

As was the case in Florida, most institutional investors sold off their shares in Fannie and Freddie after they tanked in the late 2000s, Brainard said. Based on news reports, Brainard said, the recent run-up in share values “appears to be a result of speculative investors — likely hedge funds — scooping them up.” Those are the people with the most at stake when it comes to the issue of sharing the companies’ recent profits with shareholders.

Stevens, president of the Mortgage Bankers Association, said anyone swayed by the ad is simply buying into an emotional appeal on behalf of “well-financed hedge fund” speculators. “This [ad]  is nothing more than an inflammatory exercise to pull on the emotions of people who don’t know what the bill is truly about,” he said.

The Senate mortgage plan states that as Fannie and Freddie are wound down, the 2012 policy decision that directed all dividend payments go to the federal government “shall not be amended, restated or otherwise changed.” But Sen. Crapo said in an interview on Bloomberg TV on March 13 that the intent is to leave the issue of how shareholders are to be treated  up to the courts.

Crapo, March 13:  Well, you know, the answer to that question is going to come in court rather than in Congress. They have filed suit right now in order to challenge the way that the current conservatorship is managing the current profitability of Fannie Mae and Freddie Mac. And we are not necessarily going to dictate the outcome of that. That will be a decision that’s made in the courts.

We take no position, of course, on how the courts ought to decide or whether shareholders are entitled to some of Fannie and Freddie’s profits.

Clarification, April 7:  This story was amended to make clear that the proposed Senate bill would codify the 2012 policy decision to have all Fannie and Freddie profits directed to the government via dividends  — a policy that is being challenged by private shareholders in federal court.

— Robert Farley