The long-awaited revision of revisions of legislation by Sens. Bob Corker, R-TN, and Mark Warner, D-VA, to end Fannie Mae and Freddie Mac’s long run in mortgage finance has leaked out. Homebuyers, taxpayers and shareholders, beware.
The draft bill, which sponsors continue to insist is still not finalized, would revoke the charters of Fannie Mae and Freddie Mac and create a network of private sector companies which would buy mortgages and issue a single mortgage-backed security using the Common Securitization Platform (the one built by Fannie and Freddie) and give the new MBS an explicit government guarantee. This tracks closely with a proposal from the Mortgage Bankers Association.
It took a long time for the senators to make adjustments to legislation they offered in the previous Congress. Changes made to win support from conservatives drew opposition from many Democrats and vice versa. The balance Corker and Warner struck still leaves plenty for stakeholders across the spectrum to question and dislike.
Conservatives who might have already popped open the champagne over the prospect of Fannie and Freddie’s demise should question why a government backstop for a disparate group of new private-sector players is a good idea for taxpayers. There is already some evidence that a new housing bubble is starting to grow. Even if that is not the case sharp market downturns are inevitable. Leading up to 2008, big banks were quick to abandon their mortgage securitization activities. Fannie and Freddie, however, stayed the course. While owned by shareholders, that is what their government charters required. This helped provide at least some counter-cyclical liquidity as the market was starting to implode.
As we know in hindsight, the GSEs were not in as much distress as feared. They paid back the $187.5 Treasury extended to them at the peak of the financial crisis, plus almost $100 billion more. Many big players in the financial services sector, in contrast, collapsed or needed billions in taxpayer funds. The taxpayer’s return on this “investment” was a mere fraction of what Fannie and Freddie’s shareholders have been forced to cough up with illegal the Net Worth Sweep imposed in 2012.
Conservatives who believe in the rule of law will also have to justify why the complete abdication of responsibility to Fannie and Freddie’s current shareholders is acceptable. If the Corker-Warner bill is enacted, Congress would be complicit in one of the biggest takings of private property without compensation in history. This would set a bad legal precedent and create the specter of uncertainty in markets for years to come.
Progressives, on the other hand, should worry that the experiment Corker and Warner are proposing could mean that many average Americans will find fewer mortgage options and families struggling the most to make ends meet will grapple with a weakened federal role in making sure there are options for decent affordable housing to buy or rent. Many dreams of homeownership might die in the uncertain transition period to the post-Fannie and Freddie system envisioned by the bill.
The bill’s affordable housing provisions will be touted as comparable to existing policy but in the absence of federal charter that stipulates the duty to serve struggling families, there is no reason to assume affordable housing will remain a consistent and adequately funded priority in federal housing. Skepticism among some affordable housing advocates is justified.
In addition, Fannie and Freddie have for years made it feasible for many community banks and other non-traditional lenders to operate in rural areas and small communities. While the bill has provisions related to this issue, removing the pillars of the secondary mortgage market and giving large banks more market share will almost certainly pose new challenges for underserved towns and rural areas across the country.
It turns out Treasury Secretary Steven Mnuchin appeared before the Senate Banking Committee the day the Corker-Warner draft leaked. He reiterated his view that the nearly 10-year-old conservatorship should end and that federal housing policy should protect taxpayers, preserve the 30-year-fixed-rate mortgage and maintain commitments to affordable housing. He also said housing finance is a top priority for him and pledged to work with lawmakers to get the job done this year.
This draft bill’s specific mention of all of Mnuchin’s principles along with the priorities of all other stakeholders indicates that Corker and Warner have tried to include something for everyone and strike an ideological balance. They know they will need 60 votes to win Senate passage.
Should this bill become the vehicle for long-overdue GSE reform, it should undergo careful scrutiny and analysis. Newly-installed Federal Reserve Board Chairman Jerome Powell urged caution a full undertaking of prior experience and possible future ramifications of GSE reform ideas in a speech last summer. The laundry list of priorities designed to win support from across the spectrum needs to be backed up by numbers and detailed explanations about taxpayers’ exposure during the next market crisis and whether even struggling Americans will still have right to decent housing. Guess work, lip service, and politically motivated policy prescriptions failed taxpayers, home buyers and markets in the past. Corker and company cannot be permitted to foist a repeat of these errors on the American people.