At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
Congress has always been prone to slip items into catch-all spending measures as legislative sessions draw to a close. On the GSE front, outgoing House Financial Services Committee Chairman Jeb Hensarling, R-TX, seems to be looking at taking a parting shot at the Trump Administration, American taxpayers, and people struggling to afford housing.
This week, Hensarling quietly dropped a bill that would reauthorize provisions of the ill-conceived and misnamed Jumpstart GSE Reform that Sen. Bob Corker, R-TN, dropped into an omnibus spending bill exactly two years ago – but with a nasty and counterproductive new twist.
Hensarling would cut off the funding stream to the Housing Trust Fund if Federal Housing Finance Agency Director Mel Watt were to decide to retain Fannie Mae and Freddie Mac’s quarterly earnings rather than send the money to the U.S. Treasury, as stipulated by the Net Worth Sweep. The idea is bad policy and bad politics on several fronts.
Instead of offering an idea for comprehensive housing finance reform and a path out of the “temporary” conservatorship of Fannie and Freddie that has gone on for nearly ten years, Hensarling would simply throw handcuffs on the Trump Administration. Even at a time of unprecedented intraparty dysfunction and confusion, a key Republican committee chairman abruptly hamstringing a Republican Administration is baffling.
Treasury Secretary Steven Mnuchin affirmed just recently that the Administration plans to address GSE reform in the coming year, stipulating that protecting taxpayers and preserving the 30-year fixed mortgage are two "starting points" in this undertaking. Hensarling’s bill flies in the face of both of those principles.
With regard to protecting taxpayers, Watt has warned for a year that the Net Worth Sweep, engineered by the Obama Administration, has been eating away the reserve capital at the GSEs. Within weeks, Fannie and Freddie will have no back-up capital at all. Because Congress has failed since 2008 to coalesce around a new and improved federal housing finance model, Fannie and Freddie remain wards of the state. As such, quarterly losses would have to be made up by American taxpayers.
Watt has signaled he would like to prevent that, possibly resorting to withholding quarterly dividend payments. Hensarling’s bill would take that option away from Watt and all but guarantee that taxpayers would have to bailout the GSEs again. This has become a more imminent possibility with likely enactment of legislation to drop the corporate tax rate. A rate cut would sharply decrease the value of deferred tax assets on Fannie and Freddie’s books and result in shortfalls.
Lest Watt be tempted to ignore the constraint Hensarling would impose and use his statutory power provided by the Housing and Economic Recovery Act to withhold dividend payments for the good of the taxpayers and the solvency of the GSEs, Hensarling would cut off funding for a trust fund dedicated to helping the most financially vulnerable Americans with their housing needs.
Ironically, earlier this week, Hensarling seemed to accept the reality that completely doing away with the government guarantee behind the mortgage backed securities issued by Fannie and Freddie was not feasible. “I don’t want a government guarantee, I don’t think we need a government affordable housing program but in surveying the political landscape I know they will exist in any bipartisan effort,” Hensarling told POLITICO. “At the end of the day I’m here to make progress.”
While that pragmatism seemed to actually jump start possible progress on long-overdue action by Congress, Hensarling’s departure from limited-government orthodoxy might have angered conservatives. They should be even angrier that Hensarling’s Jumpstart reauthorization, like its earlier iteration, would actually complicate and impede GSE reform. More importantly, it would increase the chance that taxpayers would have to fund a bailout in the short term. For progressives, meanwhile, Hensarling’s bill will simply reinforce their view that he is all too willing to use Americans at the margins of economic life as pawns in an ideological power play.
Perhaps Hensarling is hoping that the GSEs, without capital buffers, would need another taxpayer bailout in 2018. He could be calculating that another bailout would stoke antipathy for these enterprises and perhaps revive efforts to dismantle them. That is a reckless way to make policy and a theory totally lacking in evidence. After nearly a decade, Congress has been unwilling to do away with the GSEs.
Thus, just as the Treasury Secretary was prepared to tap his significant expertise in the mortgage arena and work with lawmakers on a way out of the long impasse, Hensarling’s proposal would undermine him. We can only hope that Hensarling is simply trying to make a statement of some kind – though it is not clear what statement is.
In the coming weeks, Congress has the daunting tasks of agreeing to omnibus spending bill and finishing up a historic tax measure. Congress has had most of a decade to get behind sound GSE reform and failed. An ill-conceived and ill-timed proposal to expose taxpayers and low-income Americans is hardly a backup plan. It will complicate the task of reform, expose taxpayers and make affordable housing more inaccessible for working families.
Ray Dalio At Robin Hood 2021: The Market Is Not In A Bubble