Today on CNBC’s “Squawk Box,” Senator Corker, delving once again into his favorite policy project, backpedaled away from statements he made on the same network last week. The senator, who just last week said that Congress should “wind down and replace” the GSEs, changed his tune to join others in calling for reform, rather than elimination, of the enterprises. From the video:
“Obviously, over time what I hope they become is a utility. Today, I’m meeting with a group that is buying the front end risk. So, you know, what we want to do is make sure that, over time, that’s what happens. Let’s make sure their portfolios shrink…You know, what we want to see happen is, over time, them become a utility. And at some point maybe they come back out on the market. Now, hopefully that’s years down the road, but what happened last week was you have people who’ve come in and bought these preferred shares…I just wanted to make sure people understood that what was being said, the rumors that were taking place were not real.”
It’s not surprising to see Senator Corker attempt to downplay “what happened last week,” when he recommended on live TV that investors short the stock of Fannie Mae and Freddie Mac. But it is striking that Senator Corker has joined the growing chorus of policy makers and industry players, notably including Mortgage Bankers Association President Dave Stevens, who have switched to calling for GSE reform rather than elimination.
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But don’t be fooled into thinking this change of heart is solely motivated by a realization that the housing market cannot effectively function without Fannie and Freddie. Senator Corker still wants to take the GSEs’ business and hand it to the big banks. Corker notes that he met today with a group that is “buying front end risk,” and made clear his desire to shift to a “risk sharing” based housing finance model at last week’s Bipartisan Policy Center event with Senator Mark Warner.
As former FDIC Chairman William Isaac pointed out in an excellent American Bankercolumn that ran ahead of the BPC event, risk sharing cannot be used as a substitute for capital at the GSEs. And handing the GSE’s business to the big banks also rips off the taxpayer. Here’s why: Through the money taxpayers invested in Fannie and Freddie before 2012 (which has been more than repaid), they now own the warrants for 80% of the GSEs’ common stock. As more GSE business is handed away, the value of those warrants decreases, sapping the remaining return on the taxpayer’s investment. Make no mistake: Senator Corker’s plan amounts to taking money from taxpayers and handing it, along with the housing market, to the country’s biggest banks.