Senator John Thune

The Senate continues to debate a bill that would restructure the way the federal government regulates our nation’s financial sector, and it is clear from the events of the last two years that smart changes are necessary. Unfortunately, the Senate recently missed an opportunity to address an underlying cause of the near collapse of our financial system: Freddie Mac and Fannie Mae. Without serious changes, these two home mortgage giants will become an even deeper hole that the government throws taxpayer money down.

Since the government completely took over Fannie Mae and Freddie Mac in 2008, taxpayers have lost $145 billion keeping the two companies afloat. While the total taxpayer bill of $145 billion is a shockingly high number, it is a fraction of what we could stand to lose in the future since Freddie and Fannie hold or guarantee 31 million home mortgages valued at roughly $5.5 trillion.

Under the original Fannie-Freddie rescue in 2008, government assistance was capped at $400 billion. However, last Christmas Eve, the Obama administration lifted the cap, indicating that the Administration anticipates the need for taxpayer funding will exceed $400 billion. This is simply unacceptable and underscores the need for major reform regarding both entities.

The Fannie-Freddie implosion is a result of irresponsible behavior and greed. People bought houses they couldn’t afford, lenders gave loans that with little underwriting and documentation, and those loans were packaged and sold with the goal of turning a quick profit. Wanting to get a piece of the action, Freddie and Fannie started buying up these subprime loans and taking great risks with the implied backing of the federal government and the American taxpayer. Even though South Dakota has, for the most part, dodged the housing foreclosure crisis thanks to the responsible borrowers and lenders in our state, taxpayers in South Dakota are still on the hook for others who made risky decisions in other parts of the country.

During the Senate floor debate of the banking overhaul bill, several of my colleagues offered a responsible amendment that would gradually wind down the government’s conservatorship of Fannie and Freddie and reduce their liability while decreasing the exposure of taxpayers. Unfortunately, this reasonable amendment failed with only one Democrat in the Senate crossing over to support the measure. Instead, the Democrats voted for and passed a study to determine what to do about Freddie and Fannie. Rather than address the problem head-on, this approach leaves plenty of time for Freddie and Fannie to lose billions more in taxpayer funds while we “study” the problem.

The burst of the housing bubble sent shockwaves through our economy, the repercussions of which we are still feeling today. The instability at Fannie Mae and Freddie Mac put South Dakota taxpayers on the hook for billions of dollars worth of bad mortgages and risky investments, and it appears as though many in the Senate are unwilling to solve this program. Financial regulatory reform must be done correctly, but this must include finding solutions to the largest problems facing our financial markets, otherwise I fear we are doing nothing more than putting a band aid on a bullet wound.