CCAGW to Senate: Oppose Johnson-Crapo bill | Council For Citizens Against Government Waste

CCAGW to Senate: Oppose Johnson-Crapo bill

Letters to Officials

April 14, 2014

U.S. Senate

Dear Senator,

Last month, a senior Treasury Department official called for giving the outstanding debt and mortgage-backed securities obligations of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac the explicit “full faith and credit” of the United States government.  This approach is currently included in the discussion draft of a bill that Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) unveiled on March 17, 2014.  On behalf of the more than one million members and supporters of the Council for Citizens Against Government Waste (CCAGW), I urge you to oppose this attempt to change the long-standing implicit guarantee of mortgage-backed securities into an explicit backstop of these obligations.

Currently, Treasury’s support for Fannie and Freddie is capped at $258 billion.  The government deliberately structured the conservatorship and financing to keep the enterprises at arms’ length.  Now, the Johnson-Crapo bill would transform more than $5 trillion in debt and mortgage-backed securities into explicit financial obligations of the United States, expanding the national debt of $17 trillion by almost one-third with the stroke of a pen.  This pushes the U.S. debt-to-GDP ratio from 102 percent up to 134 percent, putting the nation in the same category as Ireland (123 percent), Portugal (124 percent), and Italy 132 percent). 

Explicitly guaranteeing this debt is both bad policy and a significant departure from past precedent.  The government has never done anything other than provide an implicit guarantee for mortgage-backed securities.  President Obama’s fiscal year (FY) 2015 budget reiterates this position by explicitly stating that Fannie Mae’s and Freddie Mac’s securities are not backed by the full faith and credit of the United States.

On top of the assumption of all of the GSE’s debt, the Treasury Department and the Federal Housing Finance Authority decided in August 2012 to arbitrarily sweep into the government’s coffers all of the enterprises’ profits from guarantee fees, which are supposed to be used to cover potential losses of the mortgage-backed securities that Fannie and Freddie insure.  This means there is no buildup of capital at Fannie and Freddie to absorb losses from the next housing downturn. 

Rather than explicitly codifying the Treasury’s legally questionable sweep, the Johnson-Crapo bill should instead permit the GSEs to retain guarantee fees to build up their credit reserves.  Congress should let creditors and mortgage-backed-securities holders of Fannie and Freddie look only to the assets of the enterprises for repayment, consistent with the plain language of those securities and the President’s FY 2015 budget.

At a time when many in Washington are concerned about implied backstops on financial institutions, it is a terrible signal to the financial markets, the housing industry, and stockholders of any public company if the government makes a previously implicit backstop – the largest one in the markets by far – into an explicit one.  Taxpayers will certainly object to placing the debt of the GSEs onto the backs of their children and grandchildren, particularly when there is absolutely no reason for the government to assume those obligations. 

I urge you to oppose this legislation.  All votes on the Johnson-Crapo bill will be among those considered in CCAGW’s 2014 Congressional Ratings.



Thomas Schatz

President, Council for Citizens Against Government Waste

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