This op-ed was co-authored by James K. Glassman, a former under secretary of State and a visiting fellow at the American Enterprise Institute.

In the midst of the financial panic seven years ago, the government took over and bailed out two of the culprits of the bubble, the mortgage giants Fannie Mae and Freddie Mac. Now, as we start 2016, they have $5 trillion in assets but are still entirely wards of the state. It’s high time to resolve this great unfinished business. We need to extract Fannie and Freddie from their government bondage, while simultaneously ensuring they will never repeat their disastrous free ride on the taxpayers.

In September 2008, Fannie and Freddie were put in federal conservatorship as their losses from bad loans and subprime investments swamped them. The Treasury Department eventually invested $189 billion of taxpayers’ money to get their capital up to zero. Under the bailout deal, Fannie and Freddie had to pay a 10 percent annual dividend on the $189 billion in senior preferred stock that the Treasury acquired. (In addition, the government owns warrants on 79.9 percent of Fannie and Freddie common stock, which pays no dividend.)

Of course, other big financial institutions received Treasury investments as well. JPMorgan Chase, Wells Fargo, Citicorp and Bank of America—the nation’s four largest banks—received a combined $90 billion. American International Group Inc., the giant insurer, received $68 billion from the Treasury and more from the Federal Reserve. All repaid the money and continue as privately owned, publicly traded companies.

Fannie and Freddie have not retired a dollar of the government investment, although they have paid $241 billion in dividends on the Treasury’s senior preferred stock. In 2012, the government, in an agreement between conservator and the Treasury—that is, an agreement between the government and itself—changed the deal. In regular “profit sweeps,” the dividend was redefined as all of the institutions’ net profit except a bit of working capital. This abrupt change of terms has been challenged in the courts by investors, so far without success.

As a result of the sweeps, Fannie and Freddie cannot build capital. Their combined $5 trillion in liabilities is supported by a mere $5 billion in equity, for a risible capital ratio of 0.1 percent. Even minor losses would thus require more bailout money. Compare that to the 5 percent minimum capital ratio required of large banks.

So here we are: The two mortgage funders are effectively federal bureaucracies, stripped of their independence, with basically zero capital, but still dominating the market for mortgage financing.

What to do? Politicians on the left like the situation the way it is, with Fannie and Freddie under total government control and subject to the same political pressures to provide high-risk mortgages that got them into trouble in the first place. Conservatives are ambivalent. Many especially despise Fannie for its history as a Democratic Party fiefdom and would prefer to kill off both firms. Others want to relaunch them in privatized form onto the free-market, but aren’t sure how.

There is a way. Fannie and Freddie shouldn’t remain government agencies, but they shouldn’t die either because they have built considerable organizational value over the decades. The key is to transition the entities to the private sector by eliminating the previous special advantages that came with their status as government-sponsored enterprises. They should have to compete on an equal footing with the big banks. Here’s how to do that:

First, Congress should return Fannie and Freddie to the free market by eliminating the sweep on the mortgage giants’ profits each quarter and instead reinstituting the original 10 percent dividend on the Treasury’s senior preferred stock. This change should be extended back to 2012, as if the “profit sweeps” agreement never happened. Any difference between the sweep and the initially negotiated 10 percent dividend can be used to pay down the principal on the government’s senior preferred stock until it is retired. Treasury would also be required to exercise the warrants it owns for 79.9 percent of Fannie and Freddie’s common stock, and then sell the shares into the market over time.

Second, lawmakers must end Fannie and Freddie’s unfair advantage over other banks. Treasury should end the conservatorship and designate Fannie and Freddie as systemically important financial institutions, subject to the same capital-ratio requirements as large banks like JPMorgan Chase. This denies Fannie and Freddie a capital advantage over the private sector and adds a key layer of safety for taxpayers.

Congress should also make Fannie and Freddie pay a fee for the implicit federal backing that their bonds enjoy. Investors will still rightly believe that the mortgage giants enjoy an implicit backing from the federal government—and thus will be able to borrow at preferred rates. To offset this, the feds should simply charge a fee through a levy on total liabilities—the same way banks pay for deposit insurance.

Third, lawmakers must end the current exemption Fannie and Freddie enjoy from state and local corporate income taxes and enforce the law that requires increasing the g-fees that Fannie and Freddie charge to guarantee mortgage-backed securities. Those fees are now artificially low, keeping out private competitors.

Finally, Congress should ensure that Fannie and Freddie are no longer used as vehicles to promote social agendas or reward political constituencies by requiring normal congressional appropriations for what the two entities used to dole out from their subsidized profits.

Under this proposal, the two institutions would become private financial institutions on a par with other large banks. They would no longer be government-sponsored enterprises, trading favors with politicians for an implicit free guarantee. Fannie and Freddie would have to raise their own capital through debt or equity offerings and retained profits and slug it out with JPMorgan Chase, Wells Fargo, Citi and Bank of America and whatever other banks want to compete in the mortgage liquidity business.

In the omnibus funding bill last month, Congress inserted a “jump-start” provision that prevents Treasury from imposing more unilateral conditions on Fannie and Freddie like the 2012 sweep. The responsibility now lies with Congress itself to clean up the great unfinished business of 2008.

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