Well gosh darn, didn’t we just read some stuff about Fannie Mae and Freddie Mac last week? Everybody in the world knows that it was these two liberal handout-programs that led to the 2007-2008 financial crisis (see below) but they are still out there operating.
Wikipedia – Subprime mortgage bubble: “The precipitating factor was a high default rate in the United States subprime home mortgage sector. The expansion of this sector was encouraged by the Community Reinvestment Act (CRA), a US federal law designed to help low- and moderate-income Americans get mortgage loans. Many of these subprime (high risk) loans were then bundled and sold, finally accruing to quasi-government agencies (Fannie Mae and Freddie Mac). The implicit guarantee by the US federal government created a moral hazard and contributed to a glut of risky lending. Many of these loans were also bundled together and formed into new financial instruments called mortgage-backed securities, which could be sold as (ostensibly) low-risk securities partly because they were often backed by credit default swaps insurance. Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria (encouraged by regulators), and some developed aggressive lending practices. The accumulation and subsequent high default rate of these mortgages led to the financial crisis, and the consequent damage to the world economy.”
So here we are today still discussing these two behemoths in The Swamp and it appears that just as everything else, any effort to get rid of them or drastically reform them will probably get hung up in the Senate where liberals have not quite been completely silenced as a minority party.
Ultimately, if nothing is done and we go through another 2007-2008 financial crisis, who will be blamed? Who knows? It looks as if they are still arguing this point today for the last one and are getting nothing done about it…nine years later!
Despite bold talk from Republicans, the political obstacles to reforming Fannie Mae and Freddie Mac remain nearly as steep as they have been throughout the eight years that the firms have been in the government’s hands.
The biggest problem is that the finance industry wants to keep a government guarantee for mortgage securities, and liberals want any reform to fund affordable housing goals. Congressional conservatives oppose both.
For Treasury Secretary Steven Mnuchin, a former banker, overhauling the bailed-out mortgage giants is a personal priority. And the banking committee chairmen — Wyoming Republican Mike Crapo in the Senate and Texas Republican Jeb Hensarling in the House — are also projecting optimism. This week, Crapo’s committee will hold a hearing with the regulator in charge of Fannie and Freddie, the first step toward developing legislation.
Although Mnuchin, Crapo and Hensarling are meeting regularly to discuss housing finance reform, the obstacle is that a bill conservative enough to pass the House would likely be too conservative, and too industry-unfriendly, to clear the Senate and make it to President Trump’s desk.
That same dynamic saw a Hensarling-backed bill die after committee passage in 2013, and a bipartisan bill fails to gain traction in the Senate in 2014.
“Has anything changed in the dynamic such that if I were Hensarling, I could take a bill on the floor to get rid of Fannie and Freddie and have that given consideration in the Senate? No,” said Chris Whalen, head of Whalen Global Advisors. The finance industry, Whalen explained, has no problem with the current set-up, in which Fannie and Freddie, as wards of the federal government with the guarantees that entails, buy mortgages from home lenders and package them into guaranteed securities for investors.
Hensarling and other House conservatives have long blamed the guarantees for mortgage-backed securities provided by Fannie and Freddie, for inflating the subprime bubble and generating the financial crisis, back when the government guarantee for their securities was still implicit, not explicit.
Conservatives remain hostile to allowing those guarantees to remain in place or be recreated in a new system of housing finance, a stance on full display this week.
In a committee meeting to pass unrelated legislation to overhaul the 2010 Dodd-Frank financial reform law, members of Hensarling’s panel engaged in a lengthy debate with Democrats over the cause of the financial crisis, arguing that Fannie and Freddie were to blame.
“I can assure members of this committee that this issue will come back up again this year,” Wisconsin Republican Sean Duffy, head of the housing subcommittee, said during the late-night Tuesday debate. “Because we know that the root cause of the crisis was mortgage-backed securities that were securitized through the [government-sponsored enterprises].”
In contrast, Crapo was part of the bipartisan group of senators that advanced a bill in 2014 that would have ended Fannie and Freddie but maintained the government backstop for mortgage-backed securities, through a new government entity that guaranteed securities packaged by private companies.
The measure failed to garner greater Democratic support in the Senate in part because it did not do enough to advance affordable housing goals or contribute to housing trust funds for some liberal members. Crapo is now working on finding a bipartisan path forward.
Yet the 2014 bill’s framework, or something like it, is one that could work for housing markets, the mortgage security investor BlackRock said in a presentation published Friday.
The same presentation, however, labeled Hensarling’s 2013 one of the “extremes” of reform possibilities that wouldn’t work for markets.
“Those are, in my mind, irreconcilable,” American Enterprise Institute housing expert Ed Pinto said of the difference between the industry view in favor of a government guarantee for mortgage securities and the conservative perspective.
Mortgage guarantees, Pinto argued, have historically served to drive up housing prices, creating the risk of bubbles. Yet they are favored by banks, investors, homebuilders, and retailers, he argued, because higher housing prices and more sales are better for their interests. “It all comes down to the rent seeking by the housing lobby,” he said.
Conservatives also oppose the affordable housing programs favored by liberals — to them, lending goals risk instability, and housing trust funds are slush funds for left-wing groups.
Mnuchin, a former banker himself, might struggle to find a path for reform to work its way through Congress, given the gaps within and between the House and Senate.
Yet Mnuchin has not hinted at his own plans except to say that he aims to protect taxpayers and maintain the current level of access to home loans.
“There is liquidity, but that’s because these entities are being run with government support,” he said. “We want to make sure is that we can fix them and reformat them without creating a problem with housing liquidity.”
But if Mnuchin has a plan for either getting House conservatives on board with a government guarantee or finding some sort of workaround, he hasn’t said so yet.