Last week the Congressional Oversight Panel released a report on the contracting authority exercised by the Treasury Department in administering TARP programs. The report examines the use of “financial agency agreements” signed with businesses to perform governmental functions on behalf of the United States. In an Appendix to the report, the Panel highlights a case study on the largest of these agency agreements: $215.6 million obligated to the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac to support the Obama administration’s mortgage assistance programs, particularly the failing Home Affordable Modification Program (HAMP).
Under the terms of the GSEs’ 2008 conservatorship, the Federal Housing Finance Agency (FHFA) operates the GSEs ostensibly as business enterprises with the Treasury Department injecting taxpayer money into the organizations for any operational shortfall (i.e. when company liabilities exceed the value of assets). To date, Treasury has provided a $148.2 billion taxpayer bailout to the GSEs. In December 2009, Treasury Secretary Geithner approved the removal of Fannie’s and Freddie’s $400 billion funding caps ($200 billion for each firm), exposing the taxpayers to all of Fannie’s and Freddie’s losses through 2012. The Congressional Budget Office (CBO) estimates that total federal subsidy outlays to the GSEs could total nearly $400 billion through 2019.
With a track record of billions of dollars lost since 2007, the Treasury Department contracting with Fannie and Freddie to perform administration and compliance for the Obama administration’s Making Home Affordable initiative is akin to asking someone with a suspended driver’s license to be a chauffeur.
Issues of concern
Conflicting Interests: As taxpayer liabilities mount, the Obama administration shows no intention of removing the federal backstop and privatizing the GSEs’ activities. To the contrary, as the Panel’s report notes, their function as government agents results in “a fiduciary obligation of loyalty and fair dealing to Treasury, including the requirement to act in the best interests of Treasury, and not their own interests.” The report continues: “The manner in which Treasury is treating the GSEs…gives the appearance that they are government entities.” One can only be confounded by the insistence of Democrats and the President’s Office of Management and Budget to treat support of Fannie and Freddie as extra-budgetary expenditures.
Questionable Value: According to the report, Fannie and Freddie were selected as financial agents based on a number of factors. Surprisingly, the Treasury Department considered “their unique role in housing finance markets (including loss mitigation expertise)” as a criterion! It is unclear how the waste of hundreds of billions of dollars in taxpayer funds qualifies as loss mitigation.
Notwithstanding their involvement in the nationwide housing market, Panel testimony from a Freddie Mac executive indicated that “[The GSEs] may not have had the operating capabilities and infrastructure to operate a national foreclosure mitigation program.” Continuing the indictment of Fannie’s and Freddie’s function under the agency agreements, the Panel also noted: “[T]he extent to which the GSEs had the infrastructure, capabilities, and resources is not absolutely clear given the amount of subcontracting they engaged in to help fulfill their responsibilities.”
Business as Usual: The FHFA conservatorship team is responsible for oversight and performance monitoring of the GSEs’ agency agreements and “help ensure that they are compensated appropriately for their work.” Apparently, as the Panel points out, appropriate compensation means the “financial agency agreements are at-cost, with no mark up for profit, [while] the subcontracts they have entered into…are not at-cost, but allow the subcontractors to generate profit.” This is known as a guaranteed way to lose money. A footnote in the Panel’s report states, “[E]ither because of their ownership stakes in Fannie Mae and Freddie Mac or because they ultimately pay all of Treasury’s bills, taxpayers may be indifferent as to how much Fannie Mae and Freddie Mac are compensated.” Millions of Americans suffering through the current recession, tired of Democrats’ borrow-and-spend policies, do not share this sentiment with Panel members and Treasury Department officials.