Congress and GSE Reform: “Ready, Fire, Aim”?

Home sales are still abysmal and are expected to fall further. Foreclosures continue unabated, no end in sight. According to RealtyTrac, “there are 872,000 homes that have been repossessed by lenders, but have yet to be sold.” Sales of distressed homes, properties already owned by banks or in some stage of foreclosure, have slipped lower, and there is talk among the financial services experts of a double dip in the housing market.

First the Bush administration, under the Troubled Asset Relief Program (TARP), then the Obama administration have blindly thrown taxpayer money at the problem. In 2009, the Obama administration, projecting that there were still three to four million homeowners underwater and drowning in mortgage debt, hastily established the Home Assistance Modification Program (HAMP), setting aside $50 billion in taxpayer money.

By all accounts, HAMP has been a massive failure. A March 29, 2011 New York Times article detailing the shoddy performance of HAMP quotes former TARP Special Inspector General, Neil Barofsky, characterizing the Treasury Department’s ad hoc approach to the mortgage relief program as a “’ready, fire, aim’ approach.’” On March 29, 2011, the House of Representatives voted to eliminate HAMP, but the Senate, many of whose members blame the banks for the program’s ineffectiveness, intends to pursue a HAMP salvage operation. In addition, the Obama administration is concocting another mortgage bailout scheme, this time tapping those same ineffective “big banks” for the cash to underwrite the program.

In predictable fashion, official Washington has still not come to grips with the root causes of the mortgage meltdown, namely the systematic, long-term regulatory manipulation of the mortgage market, and, most explicitly, the activities of Fannie Mae and Freddie Mac, the nation’s largest government-sponsored enterprises (GSEs).

Fannie Mae and Freddie Mac, which imploded and were taken into government conservatorship in September of 2009, have already sucked up $150 billion in taxpayer bailout money. In addition, the Federal Reserve has purchased $1.4 trillion in GSE-issued and backed mortgage-backed securities. However, unlike private sector banks, which also took tens of billions in bailout money, it is highly unlikely that the GSEs will ever reimburse the taxpayers.

The administration and members of Congress have finally reluctantly stepped up to begin addressing GSE reform. Treasury Secretary Timothy Geithner released a white paper on February 11, 2011 outlining three possible directions for GSE reform, aimed at “shrinking the government’s footprint” in the housing finance market. Unfortunately, the initial legislative reform proposals emanating from Congress, specifically the House of committees with jurisdiction over the GSEs are unimpressive, tepid, and, in some cases, blatantly dangerous.

So far, between the House and the Senate, 15 GSE reform bills have been introduced since March. Some are narrowly focused (restricting GSE executives’ compensation, limiting the kinds of mortgage products the GSEs can purchase, or expanding their regulatory reporting requirements), and others are more comprehensive. None of the bills explicitly and permanently wind down the twin bankrupt mortgage giants and provide a roadmap to a completely private sector mortgage finance system, which is exactly the path Congress should be taking.

In fact, one of the most counter-productive bills, H.R. 1859, co-sponsored by John Campbell (R-Calif.) and Gary Peters (D-Mich.) would reinforce and expand government intervention in the mortgage markets. The bill envisions creating five new, privately –owned entities with explicit government backing, authorized to buy mortgages from originators and resell them to public and institutional investors. These new entities would be exempt from the Securities and Exchange Commission rules and regulations, exactly like Fannie Mae and Freddie Mac were for most of their existence before they went bankrupt. However, unlike the original GSEs, who were prohibited from purchasing very large mortgages, H.R. 1859 would open the “jumbo” market to these new, government-backed companies. The Mortgage Bankers Association, the housing construction and real estate industries fully support the Campbell bill, demonstrating their almost limitless appetite for government intervention in the housing finance, and taxpayer exposure, as long as it benefits their bottom lines.

Rep. Barney Frank (D-Mass.), perhaps the GSEs’ leading apologist, stated that even he foresees the abolition of the GSEs. Still, the fact that a destructive bill like H.R. 1859 could emerge from the HouHouse with bi-partisan support indicates that much of official Washington continues to be willfully blind to the damage that government meddling inflicts on the economy as a whole.

Congress must reinvent the housing finance market as a fully private market, without politicized manhandling by politicians. Going forward, actors in the home mortgage finance sector should either be fully private or fully public, but the hybrid GSE model, which privatizes profits and dumps the risk on taxpayers, homeowners, and the entire economy, should, within a reasonable timeframe, be extinguished permanently. Absent a widely understood and accepted account of the GSEs’ massive contributory role in the housing meltdown and the subsequent recession, the “ready, fire, aim” strategy will continue to garner the same botched results.