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Mr. Nader asked that I send the attached comments on Senator Johnson’s and Senator Crapo’s legislative framework for housing finance reform. This letter was sent this morning to all of the Senators on the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
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Mr. Nader was also scheduled to take part in a press conference this morning with a coalition called “Investors Unite.” Unfortunately, he came down ill this morning and was unable to make it. He was deeply sorry to miss it – as it involved a wide range of individual investors in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from across the country who came to D.C. to make their voice heard on the Hill. The statement he would have given at this event is also attached to this email.
April 9, 2014
Senator Tim Johnson
136 Hart Senate Office Building
Washington, DC 20510
Dear Senator Johnson,
A few weeks ago, Senator Crapo and you unveiled their proposal for housing finance reform. This is a critically important issue that has remained unresolved for far too long. For that reason, I thank you and Senator Crapo for at least sparking a discussion. But we have serious concerns about your proposal. Unfortunately, this is an issue that is complex, and thus, difficult for many people to understand. I am writing you today to express some criticisms about your legislation.
Taxpayers, consumers and shareholders should have serious reservations about this proposal for housing finance reform. It does not adequately solve some of the issues with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) that contributed to the financial crisis and their conservatorship – and indeed potentially creates new problems. It does not sufficiently protect taxpayer dollars from being devoted to another bailout. It does not advance adequate support for affordable and low-income housing for underserved communities. It sets an objectionable precedent for shareholder rights and treatment in this country. And it leaves far too many regulatory decisions up in the air.
When the broad strokes of this legislative framework were announced in mid-March, I warned that by completely eliminating Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) as a part of housing finance reform, Congress could be further opening the flood gates to Wall Street abuses and excesses. Now that the legislative language has been released, we see that this serious risk is contained therein.
The proposals in the Senate and the House do not adequately anticipate the greed and power embedded on Wall Street in its incentive structure. And without laying out a strict regulatory structure, they seem to wrongfully assume that private capital will regulate itself. Do we really want to give even more power to the ‘Too Big to Fail’ banks that were principally responsible for this crisis to begin with?
The Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were certainly not blameless for transgressions similar to those larger ones committed by the Wall Street crowd prior to the financial crisis in 2008. But to eliminate them and unravel this intricate market further, could open the door wide for runaway corporate exploitation. We don’t argue that the Fannie Mae and Freddie Mac should be maintained as is; but instead that they should be strongly regulated to prevent their previous missteps and abuses, and that shareholders should be allowed to participate in any future recovery.
In fact, many – if not almost all – of the reforms contained in the Johnson-Crapo housing finance reform legislative draft could be enacted within the framework of the current system and applied to Fannie Mae and Freddie Mac’ structure. It seems to unnecessarily complicate the reform by eliminating Fannie Mae and Freddie Mac completely and hoping a new entity in their place would purport to serve a similar purpose – all in order to advance a form of housing finance reform that could instead be applied simply to the otherwise functioning and experienced Fannie Mae and Freddie Mac.
It is our understanding that the Senate Banking Committee will be meeting in April to discuss your legislative draft. Based on our understanding of the legislative language, our concerns are laid out below. Although the list is long, please do not misunderstand it as a comprehensive list of problems that we have with the legislation – but rather that it includes some of the most glaring issues. During the Committee’s discussion in April, it is hoped that you will address the concerns that follow.
Johnson-Crapo does not solve many of the problems that contributed to financial crisis:
The legislation maintains a government guarantee. Albeit instituting a requirement that private capital take the first ten percent of losses. But this still leaves taxpayers on the hook for the other 90 percent. This does not go far enough, and maintains the problems with out-of-control moral hazard that existed prior to the 2008 financial crisis.
Securities insured or guaranteed by the proposed Federal Mortgage Insurance Corporation (FMIC) are exempt from the laws administered by the Securities and Exchange Commission. Why should these securities be treated differently? Will this not distort the market and invite exploitation?
FMIC is not adequately regulated. While Fannie Mae and Freddie Mac were regulated poorly, they did at least have regulators overseeing them prior to the financial crisis. This legislation would place the Federal Housing Finance Agency (FHFA) inside of the FMIC and leave it, and the products it approves, virtually unregulated. With such a large and powerful entity – even if it is a part of the federal government – one must be concerned about regulatory capture. Or, as its market share grows, about the FMIC turning into another iteration of Fannie Mae and Freddie Mac prior to the financial crisis.
The board, officers, and employees of the FMIC are exempt from any liability under the Securities Act of 1933. Why? There should be consequences for flouting the law; government officials should not be exempt.
The consumer voice is virtually absent from any executive or high-level positions within the FMIC – just one slot on a 9-member advisory committee to the board is vaguely dedicated to someone who can represent the consumers’ voices.
The legislative draft exempts the FMIC and its counterparties from far too many potentially crucial regulatory frameworks currently in existence. Strong regulation of this complex market is crucial to avoiding future financial crises:
There is an exemption for counterparties involved in approved credit risk-sharing mechanisms from being considered a commodity pool as defined in the Commodity Exchange Act.
There is an exemption for approved credit risk-sharing mechanisms from section 27B of the Securities Act of 1933, a section which deals with concerns about conflicts of interest. Why?
Johnson-Crapo does not protect taxpayer dollars:
The legislation sets up a Mortgage Insurance Fund (MIF), through fees, to protect taxpayers in the case of a future financial crisis. While it is good news that the legislation walls off these funds from the federal government, it doesn’t do the same for the FMIC. Instead of protecting and preserving these funds, the legislation authorizes the use of MIF funds for items other than a catastrophic scenario. It allows MIF funds to be used to pay FMIC employees, for establishing the common securitization platform (CSP), for funding the CSP, and for “all other expenses of the FMIC.”
Standards are instructed to be set for first loss credit-risk sharing mechanisms that are designed to absorb the first 10 percent of losses. But the legislation then allows the FMIC to exempt these standards in the event of a financial crisis. Does this not create perverse incentives in which aggregators, guarantors, and securitizers know that they do not necessarily need to meet the requirements to be approved and insured with a government backstop? Does this not create the same type of moral hazard that existed with Fannie Mae and Freddie Mac and their implicit government guarantee?
The legislation allows approved guarantors to fulfill their capital standards through the use of credit risk-sharing mechanisms approved by the FMIC. But it does nothing to delineate that the counterparties in these risk-sharing mechanisms need be approved or meet certain standards.
Would this not risk the integrity, safety, and soundness of these risk-sharing mechanisms? This could potentially inject an unknown amount of risk and would seem to not be a safe and secure means of protecting the FMIC or the MIF against losses. We would imagine that this opens up an exploitable loophole.
Johnson-Crapo is not good for affordable housing:
The affordable housing goals of Fannie Mae and Freddie Mac are eradicated when the legislation eliminates Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). This is not replaced by any new