The American Enterprise Institute has fired the first serious salvo against the proposed GSE reform bill coming out of the Senate Banking Committee, calling it rather damningly the “ObamaCare of GSE reform.”

Former ambassador James K. Glassman, a senior fellow at AEI, says that the Johnson-Crapo reform measure would be a solution far worse than the problem.

Given the current unpopularity of ObamaCare and the way most Democrats are sprinting away from the health reform they passed in this off-election year, labeling this the “ObamaCare of GSE reform” could be as damning a way to frame the argument in popular terms as is it among conservatives when any immigration reform measure is labeled “amnesty.”

Earlier this year, Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, unveiled their plan to reform Fannie Mae and Freddie Mac, the government-sponsored enterprises responsible for backing 90% of mortgages.

When Johnson-Crapo was rolled, it was generally greeted with praise, with some notable dissent from some lenders. Reactions grew more negative among investors, some of whom called it a fat target for micromanagement, but overall the industry hasn’t greeted Johnson-Crapo the way that the banking industry greeted the House’s comprehensive tax reform overhaul coming out of the Ways and Means Committee.  

If anything, the housing industry’s desire for any kind of GSE reform gave Johnson-Crapo a smooth flight path.

HousingWire has covered how a variety of affordable housing advocacy nonprofits have embraced Johnson-Crapo. The nonprofit Enterprise Community explained four reasons why it think Johnson-Crapo will help with affordable housing concerns. A senior fellow for the Urban Institute similarly praised the bill’s effect on issues of affordable housing.

AEI’s take on Johnson-Crapo comes from a free market, more libertarian perspective.

Glassman calls Johnson-Crapo “a complicated apparatus disturbingly similar to Obamacare.”

The idea is to get rid of the two GSEs and replace them with a system of private lending with securities explicitly backed by the federal government, Glassman says.

“In going through contortions to reinvent the housing finance system, the senators have avoided the obvious solution: keep the basic platform that has generally served American homeowners well but reform it to reduce risks,” Glassman says. “Instead, Johnson and the others have come up with a contraption that resembles the Affordable Care Act in its convolutions and its potential for unintended consequences.”

The former ambassador and executive director of the George W. Bush Institute says it is difficult to understand why legislators think that government can restructure housing, which is one-sixth of the economy, better than the attempt to restructure healthcare, also one-sixth of the economy.

“The legislation would also add $5 trillion to the liabilities side of the federal balance sheet and tempt ratings agencies to demote government bonds again,” he says. “And, in defiance of the rule of law, the senators blithely strip shareholders of all their assets in two major businesses. This is behavior you expect in Venezuela, not in the United States, and it will certainly lead to an erosion of investor confidence.”

After the housing crisis, the GSEs were wallowing and were bailed out to the tune of $187 billion.

The GSEs emerged from the disaster sound and profitable only recently, and have already repaid $185 billion to the Treasury and later this month are scheduled to add $18 billion more, giving taxpayers a solid profit.

Fannie, still under federal conservatorship, reported annual net income for 2013 of $84 billion, which includes the release of the company’s valuation allowance against its deferred tax assets, and annual pretax income for 2013 of $38.6 billion.

“Citigroup, AIG, and other recipients of bailout funding paid back what they owed, and those companies still exist – and, in most cases, thrive – with private capital provided by large and small shareholders and lenders. Fannie and Freddie, on the other hand, are zombies, stripped of their capital, with shareholders hanging on in hopes that the feds will come to their senses and abide by the rule of law,” Glassman says.

What Fannie has not done is pay a dime to shareholders. In fact, it appears the shareholders were never going to be repaid. A Dec. 20, 2010, Treasury Department memo to then-Secretary Timothy Geithner from domestic finance undersecretary Jeffrey Goldstein, said the Obama administration had a “commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s (sic) in the future.” (Read the story here.)

Glassman says many investors held onto their pre-2008 Fannie and Freddie shares, and others bought after prices collapsed, and are now getting screwed over.

A group of investors led by former U.S. Solicitor Ted Olsen and consumer advocate Ralph Nader are suing to demand that the government follow its original 2008 agreement and stop taking shareholders’ money beyond the original payback deal for the bailout.

Fannie and Freddie’s coziness with Democrat politicians has created an irrational desire among Republicans and conservatives to get rid of the GSEs in favor of  the unwieldy Johnson-Crapo act, Glassman says.

“In addition to this over-the-top ‘Fannie-mosity,’ many conservatives simply are not convinced that Fannie and Freddie, which have been effectively reformed, will stay that way. Rather, they worry, the GSEs will be exploited to promote liberal social policy or return to funding loans to low-income borrowers who might not afford them – and we’re back where we started,” he says.

The solution?

“…it can be handled with capital requirements and regulatory oversight as too-big-to-fail financial institutions. Have the president state clearly that the GSEs no longer have their guarantee, explicit or otherwise, from the U.S. government,” Glassman says.