Ads attack Sen. Mike Crapo's mortgage bill

An advocacy group says the legislation would rob investors in Fannie Mae and Freddie Mac.

zkyle@idahostatesman.comApril 6, 2014 

A screen shot from the TV ad linking Sen. Mike Crapo to President Barack Obama and the mortgage-finance reform bill to the Affordable Health Care Act.


    Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., were created by Congress to stimulate the housing market and mortgage lending. They accomplish that by buying up pools of mortgages from banks and other mortgage lenders. That frees lenders to make more loans without having to keep the original loans on their books. Fannie, Freddie and the Federal Housing Authority back more than 90 percent of U.S. mortgages.

    Weakly regulated, Fannie and Freddie bought subprime and other risky mortgages in the 2000s that later soured. And neither company kept enough capital on hand to absorb the housing crash. The federal government injected money into the companies in 2008 to prevent the market from crashing further.

    As the nation's housing markets have recovered, Fannie and Freddie are again raking in billions in profits. They recently repaid the $187 billion they owed to taxpayers. However, the government still owns 80 percent of the companies, leaving taxpayers on the hook if the market plummets again.

    The Crapo-Johnson bill would eventually dissolve Fannie and Freddie and return the secondary mortgage market - where mortgages are bundled and used as collateral for bonds and securities that are sold to pension funds and other big investors- to the private sector.

    The federal government would remain the ultimate financial backstop for the industry, but mortgage brokers and insurers packaging and buying loans would first have to keep capital equal to 10 percent of the pooled mortgages' value, much as banks must retain capital to protect against loans going bad. A Senate Banking Committee staffer told the Idaho Statesman that the bill's capital requirement would have formed a pool of money large enough to protect taxpayers from the 2008 crash had it been in effect then.

    The government would also create the Federal Mortgage Insurance Corp. to regulate the industry in the same way that the Federal Deposit Insurance Corp. regulates banks, by charging insurance premiums to build and maintain a fund for paying claims.

    By making the private sector assume risk now borne by taxpayers, the bill could raise the cost of home mortgages.

    Zach Kyle

Idaho Sen. Mike Crapo has become a target of a negative-ad campaign because of a bipartisan bill he co-sponsored to reform the mortgage-finance industry.

A group called 60 Plus Association is paying for the $1.6 million campaign to air TV and radio ads in Boise and in markets represented by six other members of the Senate Banking Committee who support the bill. Crapo, the committee's senior Republican, crafted the bill with its Democratic chairman, Tim Johnson of South Dakota.

The 60 Plus Association describes itself as a nonpartisan seniors advocacy group with a free enterprise, less government, less taxes approach and says it was founded in 1992 as an alternative to the AARP. It favors ending the federal estate tax and reforming Social Security.

The anti-Crapo ads are aimed at protecting the interests of shareholders in Fannie Mae and Freddie Mac, the two government-created mortgage-finance companies the government seized when they collapsed into insolvency in the financial crisis of 2008. The companies' shares lost nearly all of their value, but some investors either held on to them anyway or bought them speculatively on the cheap, hoping for Fannie and Freddie to recover and for the prices to revive.

60 Plus says millions of ordinary investors hold the shares through pension or retirement accounts, an assertion Crapo disputes. The Johnson-Crapo bill would phase both companies out of existence.

The 60 Plus ads also link Crapo to the Affordable Care Act.

"First, it was Obamacare," says the narrator of the TV ad. "Millions of Americans had health care plans canceled. Now, Mike Crapo is teaming up with Obama to take over the mortgage industry."

Crapo said the ad misrepresents the bill as big-government and him as liberal.

"The people of Idaho know me better than that," Crapo told the Idaho Statesman. "The campaign tactic of trying to link someone to President Obama is very common. It's not surprising they're trying to use President Obama and Obamacare as a campaign weapon."

The fight has its roots in the housing crisis in 2007 and 2008 that contributed to the Great Recession.

To prevent financial chaos that might have turned the recession into a depression, Congress approved a $187 billion bailout of the companies with taxpayer money. That money has since been paid back, and the companies have returned to profitability, but they remain in conservatorship, and the government is keeping their profits.

Investors want the government to free the companies again. Johnson, Crapo, the Obama administration and other authorities say that would subject taxpayers to the same risk that led to the bailout.

Fannie's stock rose to more than $86 a share and Freddie's to more than $73 before each plummeted to about 20 cents by 2011. The prices didn't move up much until 2013. They plunged when Johnson and Crapo announced their bill last month. Fannie shares closed Friday at $3.84 and Freddie at $3.83.

Under the Crapo-Johnson plan, investors would get nothing. That's not fair to the shareholders who own the 20 percent of the companies not held by the government, said Gerry Scimeca, 60 Plus director of media relations.

"As an investor, you assume the risk of bankruptcy," Scimeca said. "You don't assume risk of government coming in and saying, 'We'll change the rules a few years later and take all your investments.' "

60 Plus has received almost $60 million from the conservative Koch brothers' Freedom Partners, but the Kochs don't support the ad campaign.

A separate group of investors, including hedge fund Perry Capital and mutual fund firm Fairholme Capital Management, has sued over Treasury's retention of the profits. Crapo said his bill would work even if a court sides with those shareholders and orders the government to pay them.

The ad talks about "ordinary investors" who will lose investments, such as teachers, police officers and firefighters.

Crapo said most individual investors sold their stock in Fannie and Freddie when the stock started diving in 2007. The investors that bought stock during the conservatorship were hedge funds or other large financial institutions, he said.

"They targeted the low price and thought the government would either bail the companies out or put them back out into the market where they'd grow into huge financial institutions and dominate the housing market," Crapo said.

Crapo said his bill will have to survive a gridlocked Congress and distractions caused by November elections, but he isn't worried that the 60 Plus campaign will derail it.

"I don't think the ad will make much of a difference," Crapo said. "I think the ad overstates its case, and that most people figure that out."

Zach Kyle: 377-6464, Twitter: @IDS_zachkyle

The Associated Press and Bloomberg News contributed.

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