[Congressional Record Volume 149, Number 73 (Thursday, May 15, 2003)]
[Extensions of Remarks]
[Page E972]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




           THE SECONDARY MORTGAGE MARKET FAIR COMPETITION ACT

                                 ______
                                 

                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                         Thursday, May 15, 2003

  Mr. STARK. Mr. Speaker, I rise today to introduce, the ``Secondary 
Mortgage Market Fair Competition Act.'' The bill would allow states to 
tax Fannie Mae and Freddie Mac on their pre-tax earnings by eliminating 
Fannie and Freddie's state and local tax-exempt status under their 
federal charter.
  When Congress chartered Fannie Mae and Freddie Mac (in 1968 and 1970 
respectively) there was a need to provide a steady stream of revenue 
for home mortgage loans in order to increase homeownership in the U.S. 
Congress provided certain privileges to Fannie and Freddie in their 
charter that would allow that stream of revenue to continue to grow. 
Fannie Mae and Freddie Mac corporations are now the leaders of the 
secondary mortgage market and have established a strong revenue source 
for the primary mortgage market. It is due to these successes that I 
believe it is time for Congress to amend the corporations' charter and 
repeal their local and state tax-exempt status. Due to the current 
state fiscal crises, Congress should not wait to enact this amendment.
  A bank originates a loan to a home purchaser and turns around and 
sells that loan to Fannie Mae or Freddie Mac, thus allowing the bank to 
use the proceeds from that first loan to originate another loan. Fannie 
Mae and Freddie Mac finance the purchase of these loans by issuing a 
tradable commodity in the form of mortgage-backed securities or MBS. 
When Congress chartered Fannie Mae and Freddie Mac it granted them 
special privileges--among these is the state and local tax exemption--
not available to other private-sector firms. This was done to attract 
investors to purchase Fannie Mae and Freddie Mac securities. This in 
turn provided a steady stream of revenue available for home mortgage 
loans and thus, increased homeownership in the U.S. In 1992, Congress 
refined their charter and placed new requirements on the corporations 
to expand homeownership opportunities to underserved communities.
  Fannie and Freddie are now thriving, successful private corporations. 
In 2001, Fannie and Freddie earned $10 billion in profits combined and 
made Fortune magazine's list of most profitable companies. Fannie 
ranked 13th while Freddie ranked 18th. Both have shown record profits 
every year during the past 10 years. Fannie and Freddie guarantee 
payments to bond investors for $2.7 trillion in mortgage debt or 44% of 
the U.S. total. Thirty-five years after Fannie Mae's charter, these two 
entities are strong and profitable enough to provide a steady stream of 
home loan revenue without the state tax-exempt privilege.

  Their income is currently taxed at the federal level. But, they do 
not pay state or local corporate income taxes. In addition to the state 
tax exemption, other advantages of their federal charter include 
exemptions from Securities and Exchange Commission registration fees. 
The implied federal guarantee on their mortgage-backed securities also 
gets them lower borrowing costs than their competitors. In fact, in 
2001 the Congressional Budget Office found that Fannie Mae and Freddie 
Mac's government-chartered status translates into a subsidy of $13.6 
billion per year for these private, self-sufficient corporations.
  One might think that a subsidy of this nature is justified since the 
corporations are supposed to provide homeownership opportunities to 
underserved homebuyers. However, recent reports show that despite this 
worthy goal, Fannie and Freddie may not be fulfilling this promise. In 
April 2002, the Department of Housing and Urban Development (HUD) found 
that, ``they continue to underperform the conventional conforming 
market in funding the affordable home purchase loans for borrowers and 
neighborhoods targeted by the housing goals.'' The report also 
indicates that Fannie and Freddie ``account for a very small share of 
the market for important groups such as minority first-time 
homebuyers.''
  Given all of these facts, I believe it is time to withdraw the 
exemption from state and local taxes for these companies. At a time 
when states are scrambling to find solutions to their budget 
shortfalls, passage of this legislation would provide a much-needed new 
revenue source for states that choose to tax Fannie and Freddie on 
their corporate income. My bill in no way requires the states to tax 
Fannie Mae and Freddie Mac, it merely allows them to do so. It will 
also help to level the playing field for Fannie and Freddie's 
competitors by eliminating this tax advantage provided to Fannie and 
Freddie. At a time when states are facing fiscal crises and Fannie Mae 
and Freddie Mac are facing healthy profits, states should be provided 
the opportunity to tax these corporations just as states tax their 
competitors.
  The fact that these corporations are doing so well is a clear 
indicator that Congress' charter has served the public and the home 
loan mortgage industry well. But these successes should not lead 
Congress to shelter Fannie and Freddie from the rigors of the 
marketplace indefinitely. The need for Fannie and Freddie's state and 
local tax-exempt status has come and gone. Let's be true to states' 
rights and allow the states to determine the tax treatment of these 
corporations within their borders.
  I urge my colleagues to cosponsor this bill to eliminate the state 
and local tax-exempt status no longer needed by the Fannie Mae and 
Freddie Mac corporations.

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