Politics

Hensarling’s False Choice on Affordable Housing and Fannie Mae Reform

House Financial Services Committee Chairman Jeb Hensarling today issued a not-so-subtle warning to Democrats: Support evolving GSE reform legislation now or risk having affordable housing programs gutted next year.
During a hearing today Hensarling engaged in this colloquy with Treasury Secretary Steven Mnuchin:
Hensarling: It’s now been 10 years since the financial crisis and regrettably Congress has failed to act. If we once again fail to act, and some of us are trying to work on housing finance reform, but if we fail to act isn’t it true that a year from now the President gets to appoint a new Federal Housing Finance Agency Director (FHFA) director who will serve for a 5 year term?
Mnuchin: That’s correct.
Hensarling: And is it true that the FHFA director is not just the regulator of GSEs but also the conservator?
Mnuchin: Correct.
Hensarling: And isn’t it true that as conservator, the FHFA has broad, sweeping powers. For example, is it true if Congress doesn’t act the FHFA director can discontinue the GSEs HARP finance program?
Mnuchin: That’s correct, Mr. Chairman.
Hensarling: Is it also true the FHFA director could suspend all GSE contributions to the Housing Trust Fund if found they “contribute to the financial instability of Fannie and Freddie?”
Mnuchin: Yes, that’s correct.
Hensarling: And under U.S.C.124566, that the FHFA director can essentially choose not to enforce the statutory housing goals of the GSEs if he finds “the achievement of the housing goal was or is not feasible?”
Mnuchin: That’s correct.
Hensarling: I’d hope all within earshot have listened carefully at what might happen if we choose not to engage on GSE reform and again, we look forward to working with you, Mr. Secretary, with the Administration and with my friends on the other side of the aisle in hopes we can find America a truly sustainable housing finance system, one that helps put people in homes they can actually afford to keep.
At face value it looks as though Hensarling has had a stunning epiphany. Once a principled opponent of government meddling in the home finance market, Hensarling late last year acknowledged that completely doing away with some form of government guarantee was not feasible. At today’s hearing he went even farther, casting himself as the guardian of Fannie Mae and Freddie Mac’s role in promoting affordable housing options for lower-income Americans.
But that is not what is really going on here.  This is part of a campaign to get Democrats to support legislation that could dismantle Fannie Mae and Freddie Mac and eventually turn the secondary mortgage market over to private sector entities, most likely large banks. Sens. Bob Corker, R-TN, and Mark Warner, D-VA, are putting the finishing touches on such a measure.  In the absence of a more viable proposal in the House, the Corker-Warner bill could be the vehicle for ending the ten-year-old stalemate on what to do with Fannie and Freddie. Recent proposals for GSE reform from FHFA Director Mel Watt, a former Democratic Congressman, have already drawn the ire of conservatives for not going far enough to replace Fannie and Freddie. Watt’s outline would leave affordable housing policies largely unchanged. The Corker bill would aim to preserve these policies as well but in the absence of federal charter stipulations to do so.
Hensarling’s dire warnings about a post-Watt world sound a lot like a blog by Mortgage Bankers Association President Dave Stevens, which offered cautious praise for the draft Corker-Warner measure, especially with regard to equal treatment for a wide variety of mortgage originators:
I realize that there is a lot of anxiety associated with any change, but we are beyond that. In the year ahead we will be faced with a new FHFA director who may have a very different view about the role of the government in housing, and may come with different perspectives about who participates and how they participate. Bank vs non bank, servicing retained or sold, and more could potentially be viewed very differently.
Similarly, last week, when the draft Corker-Warner bill was leaked, Jim Parrott, a former Obama Administration official, told the American Banker, “Anyone who thinks that this administration is going to pursue an administrative path that is to the left of where the bipartisan group in the Banking Committee is has utterly lost their minds.” He added, “If this effort falls apart, in a year we’ll have a conservative FHFA director and Trump administration working as aggressively as they can to reduce the government’s role in this market, and anyone who cares about progressive housing policy will regret that we let this moment pass without doing more to help.”
Remember, however, that  Parrott was instrumental in designing and implementing the Net Worth Sweep in 2012, which diverted the GSEs’ profits to Treasury, effectively preventing them from recapitalizing and setting them up to be wound down and supplanted by private-sector entities.

The apocalypse foreseen by Hensarling and others is not inevitable.  If the goal is to preserve affordable home ownership and rental housing access, the best course of action would be to end of the conservatorship, lock in significant reforms implemented under Watt, and suspend the Net Worth Sweep.  Hensarling is correct. The Housing and Economic Recovery Act gives FHFA ample authority to do just that.  In doing so, FHFA might actually hew fairly closely to Mnuchin’s “starting points” for GSE reform – protecting taxpayers, preserving the 30-year mortgage, and maintaining affordable housing access.