If there is consensus about the Johnson-Crapo plan for Fannie Mae and Freddie Mac, it is that groups on both sides of the political spectrum disliked it so much that Senate leaders put the kibosh on it two years ago and have not brought it up since. But Michael Stegman, a former Obama Administration housing guru who now offers his expertise at the Bipartisan Policy Center, thinks it represents the ideal starting point for housing finance reform.

 

Fannie Mae
Photo by NCinDC

Bank of America, Citi, Credit Suisse, Goldman Sachs, and the Institute of International Bankers that back the Bipartisan Policy Center might agree. Homeowners, taxpayers and certainly shareholders in Fannie and Freddie, however, should insist on something better.

In a nutshell, the bill (authored in 2014 by then-Senate Banking Committee Chairman Tim Johnson, D-SD, and then-Ranking Member Mike Crapo, R-ID) would wind down the GSEs and enable private sector financial powerhouses to issue mortgage-backed securities with the backing of the federal government (meaning the taxpayer), providing they retain enough of a capital cushion.

If that sounds like crony capitalism and a potentially bigger role for government in housing finance, then it would come as no surprise that, at the time the bill was introduced, over two dozen conservative groups, including the Competitive Enterprise Institute, Club for Growth, FreedomWorks, Americans for Tax Reform, National Taxpayers Union, and the American Family Association, sent a letter to Banking Committee members arguing that the bill would not constitute real reform but “an expansion of the type of government intervention that fueled the housing crisis in the first place.”

On the other side of the spectrum, the National Leadership Conference on Civil and Human Rights, National Association for the Advancement of Colored People, National Coalition for Asian Pacific American Community Development, National Council of La Raza, National Fair Housing Alliance, National Urban League, and Center for Responsible Lending were among the organizations that expressed concern that the bill would not do enough to make mortgage credit equitably available to communities of color. 

Nonetheless, in a recent commentary for the BPC, Stegman praised the bill for containing the elements of what the majority of lawmakers could get behind to create a successor to Fannie and Freddie.  His views continue to rest on the premise that anchoring so much of the mortgage business in too-big-to-fail GSEs is not sustainable and needed to be pushed onto the private market. But he must realize that too-big-to-fail banks would be the only entities capable of trying to duplicate Fannie and Freddie’s role. Based on their track records leading up to the 2008 financial crisis, there is no reason to think these institutions would reliably perform Fannie and Freddie’s public mission to maintain countercyclical liquidity or protect taxpayers from having to cover major losses.

In addition, while Stegman recognizes that capital is important to protect investors and taxpayers, he continues to gloss over the systematic depletion of the GSEs’ capital during the four years since the Net Worth Sweep has been in effect. Fannie and Freddie could be one bad quarter away from having to seek taxpayer assistance again, thanks to the Sweep.

Finally, one of the ten reasons why Stegman regards Johnson-Crapo as a good starting point for the next president and Congress is that it would provide for “the sale and repurposing of critical GSE assets—systems, infrastructure, and human capital” to help with the “smooth transition” to a new system.  In fact, this is one of the worst elements of the proposal. It would codify the Sweep and the illegal trampling of the rights of shareholders. It would dismantle privately-held companies that are not insolvent.

Perhaps Stegman’s view should come as no surprise. He has long held that the GSE model leading up to the financial crisis was not sustainable.  During his tenure at Treasury and the National Economic Council from 2012 to 2016, the Administration signaled its desire to replace Fannie and Freddie with something else, the rights of shareholders notwithstanding.  Of course, policymakers’ hostility to Fannie and Freddie predates his tenure. The terms of the lifeline provided the GSEs in 2008 required them to pay 10% dividends to Treasury. That was twice the rate many of the Wall Street banks bailed out with Troubled Assets Relief Program (TARP) money were required to pay.  Shareholders in AIG and Citigroup were at least able to benefit as those companies recovered. Fannie and Freddie shareholders, meanwhile, have been powerless as more than $60 billion, on top of the $187 billion credit line, has been sent back to Treasury.

Whoever is elected to the presidency and Congress in a little more than two months from now will need to grapple with how to end the conservatorship, consistent with the law and with the best interests of taxpayers, homeowners and shareholders in mind. No one thinks reform is not in order.

At the same time, elected leaders will also need to be accountable to an electorate fed up with sweet-heart deals Washington has provided to well-healed interests at the expense of average people. On that much, there is bipartisan consensus just as there is bipartisan consensus that Johnson-Crapo missed the mark on GSE reform – unless you happen to be a big bank.