On Tuesday, November 7, 2017, at 10:00 a.m. in Room 2128 of the Rayburn
House Office Building, the Housing and Insurance Subcommittee will hold a
hearing entitled “Sustainable Housing Finance, Part III.”
That is correct, yet another hearing in Congress on what to do with mortgage giants Fannie Mae and Freddie Mac and the Federal government guarantee.
Here is the witness list:
- Mr. Peter Wallison, Senior Fellow and Arthur F. Burns Fellow in Financial
Policy Studies, AEI
- Dr. Mark Zandi, Chief Economist, Moody’s Analytics
- Dr. Michael Lea, Cardiff Consulting Services
- Ms. Alanna McCargo, Co-director, Housing Finance Policy Center, Urban
- The Honorable Theodore “Ted” Tozer, Senior Fellow, Center for Financial
Markets, Milken Institute
To understand what will be said, it is best to look at the hearing through the lens of Nobel Laureate George Stigler’s Theory of Regulatory Capture. Regulatory capture is a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
So, let’s look at the witnesses to glean what they will say and who they likely represent.
Peter Wallison is the grand daddy of shutting down Fannie Mae and Freddie Mac. Who benefits? The TBTF banks like Bank of America, Citi, JPMorgan Chase and Wells Fargo since they will inherit the securitization business. Unless another way is found.
Mark Zandi is a coauthor of “A More Promising Road to GSE Reform”L with Jim Parrott (a nonresident fellow at the Urban Institute) , Lewis Ranieri (of “The Big Short” fame), Gene Sperling (economist for Clinton and Obama), Mark Zandi and Barry Zigas (Senior Vice President at Fannie Mae from 1995-2006). Like Wallison, Zandi advocates shuttering Fannie Mae and Freddie Mac. But he favors creating a NEW Federal government insurance corporation. Essentially, shutting down two corporations and replacing it with one gigantic corporation. Only in Washington DC would Congress consider creating one humongous TBTF corporation. Who benefits? Not taxpayers.
Michael Lea is a former Chief Economist for HUD and Freddie Mac. He will likely opine on the notion that housing finance systems are often Federally guaranteed around the globe. He will also likely opine that foreign countries generally use adjustable-rate mortgages (ARMs) rather than the high duration risk 30 year fixed-rate mortgage.
Alanna McCargo is at the left-leaning Urban Institute with Laurie Goodman. With a united front from the Urban Institute, McCargo will likely be in favor of shutting down Fannie Mae and Freddie Mac and greatly expanding credit to borrowers (under the assumption that mortgage credit is too tight). Who wins? The affordable housing contingent.
The Honorable Theodore Tozer is former President and CEO of Ginnie Mae. And now at the Milken Institute. Ed DeMarco, the former FHFA head honcho, and also at the Miken Institute, recommends
- Wind down Fannie Mae and Freddie Mac,
- Build a common securitization infrastructure to serve as the backbone for mortgage securitization in a post-conservatorship world, and
- Shift mortgage credit risk from taxpayers back to market participants
My guess is that this is what Tozer will recommend.
So, every panelist (or witness) will likely call for the shutdown of Fannie Mae and Freddie Mac.
Some of the panelists will call for easing of credit restrictions in order to increase homeownership. This can be achieved by reducing transparency and making the housing finance system more like HUD/FHFA.
It is all about the Federal government guaranteeing the 30 year fixed-rate mortgage
Do not be confused. This hearing is all about how the Federal government can guarantee the 30 year fixed-rate mortgage which accounts for 93.2% of single-family mortgages in the USA. Adjustable-rate mortgages (ARMs) account for only 6.8%.
The ARMs that blew up in the financial crisis were not “plain vanilla” ARMs, but exotic ARMs like teaser-rate ARMs and Pick’a’pay ARMs. But what will NOT be mentioned in the hearing is that the 30-year Fixed Rate Mortgage is an implicit entitlement.
But let us remember some important facts. Much of the housing bubble (and burst) was due primarily to the rapid expansion of credit from 1992-2006. And most of that credit expansion was due to Federal government policies such bank deregulation under President Bill Clinton such as the Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672), Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160), Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338), Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338)
Not to mention HUD’s National Homeownership Strategy: Partners in the American Dream. Also under President Clinton which calls for streamlining of underwriting among other things.
So while is convenient to blame Fannie Mae and Freddie Mac for the housing bubble, it was actually the Federal government that created the housing bubble and burst through regulatory changes and activist HUD policies. So, get real Congress.
Be careful what you wish for. It could be worse than the existing equilibrium. Shutting down Fannie Mae and Freddie Mac will definetly benefit the TBTF banks and affordable housing groups to the detriment of taxpayers.
There is an alternative: covered bonds. Covered bonds are debt securities issued by a bank or mortgage institution and collateralized against a pool of assets that, in case of failure of the issuer, can cover claims at any point of time. A good example are the Danish covered bonds.
I will be waiting for some member of Congress to say “Psych!!! You just got jammed!”
But like many regulatory exercises in Washington DC, the finished product will be a hodgepodge of carveouts for special interests, not what is in the best interest of the public.