Geez, Louise: Let’s Squeeze the GSEs!
Joe and Teresa Giudice, aka one of the “Real Housewives of New Jersey,” are fresh off of a 39-count indictment for mail fraud, wire/bank/bankruptcy fraud and making false statements on mortgage loan applications. And when it comes to misleading mortgage-related information, their anthropomorphic equivalent may just be that government-sponsored (and now owned) enterprise (GSE) couple, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, aka Fannie Mae and Freddie Mac.
Citizens Against Government Waste (CAGW) has long inveighed against the mortgage giants’ excesses and the dire consequences to taxpayers of failing to rein them in. A decade ago, on June 25, 2003, CAGW President Tom Schatz testified before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, sounding a prescient (and tragically Cassandra-like) warning: “It is clear that because of their size and market concentration, Fannie Mae and Freddie Mac are too big to fail… no matter how many times the GSEs say that they are private companies, independent of the government, everyone knows that is not the case. The American taxpayer is on the hook if anything goes wrong with the GSEs, and therefore, effective regulation and accountability must be of paramount importance.”
While the eventual train wreck played out in slow motion, relative to the 2003 admonition, the housing market finally collapsed in 2007, and the financial crisis from which the nation still struggles to emerge ensued in 2008. The resulting $189 billion GSE taxpayer bailout is the largest in American history.
The privatization of Fannie Mae and Freddie Mac (that is, getting taxpayers off the hook for any more failures) has perennially been listed as one CAGW’s Prime Cuts, a compendium of recommendations to reduce the waste and inefficiency of the federal government. CAGW has noted that the GSEs were endowed by Congress with special benefits not afforded to other firms in the secondary mortgage market, including lines of credit through the U.S. Treasury, exemption from income taxes, and some freedom from Securities and Exchange Commission (SEC) oversight. Their biggest advantage was their implicit federal guarantee: in a crisis, Uncle Sam was assumed to be willing to step in to bail out the mortgage giants, allowing them to borrow at lower rates than would have otherwise been possible.
On September 6, 2008, with their shares having lost 90 percent of their value, the GSEs were placed in conservatorship by the U.S. Treasury. On June 2, 2011, the Congressional Budget Office asserted that the U.S. might need to provide up to $317 billion to cover losses at the GSEs, including money already spent up to that point. It is long past the time for America’s albatrosses of the mortgage market to be jettisoned.
House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has done something that very few before him have dared to undertake. On July 22, 2013, he joined with Capital Markets and GSE Subcommittee Chairman Scott Garrett (R-N.J.), Financial Institutions and Consumer Credit Subcommittee Chairman Shelley Moore Capito (R-W. Va.), Housing and Insurance Subcommittee Chairman Randy Neugebauer (R-Texas), and Oversight and Investigations Subcommittee Chairman Patrick McHenry (R-N.C.), to introduce H.R. 2767, the Protecting American Taxpayers and Homeowners (PATH) Act. The bill, which was also referred to the House Ways and Means Committee, was marked up and passed by the Financial Services Committee on July 24, 2013, by a vote of 30 to 27.
A July 11 Financial Services Committee press release noted that the proposal would end the Fannie and Freddie taxpayer-funded bailout and phase them out within five years and provide consumer with more choices to match a mortgage product to their needs by increasing competition through ending the government’s domination of the mortgage market.
The press release included statements from the bill’s co-sponsors, including Chairman Hensarling, who said, “America needs a housing policy designed for homeowners and taxpayers – not for Wall Street and the housing industry. America needs a housing policy designed to give every American who works hard and plays by the rules both opportunities and choices to buy a home they can actually afford to keep.” Rep. Garrett noted that “this legislation will finally end the largest bailout in history,” while Rep. Neugebauer observed that “we’ll also reduce the probability of the boom and bust cycles that have hurt our economy and American families.” Added Rep. Capito, “American consumers are best served when the federal government does not control the market. We need a sustainable system that puts the interest of taxpayers and homebuyers first.”
Supporters of GSE reform such as Heritage Foundation and The Wall Street Journal have lauded the Republican initiative, levying only minimal criticisms. “While not perfect, the Hensarling plan provides a good starting point for Congress as it debates housing finance reform,” noted Heritage’s John Ligon. “Less admirable,” wrote the Journal, “is the bill’s proposal for a National Mortgage Market Utility that would set best practices for mortgage securitization… Many industries set best practices without government intervention, and mortgages should be no different.”
Chairman Hensarling has acknowledged that the legislation in its current form will face challenges on the floor of the House, but he wanted to kick-start reform while being open to compromise in order to move the process forward. Since the fate of the GSEs was relegated to the margins for years, the taxpayers and the stakeholders in the mortgage market are owed a way out of this morass. As Chairman Hensarling said, “America can do better. Americans deserve better.”
Like the indicted Giudices of New Jersey, the federal government would do well to get out of the mortgage business altogether. It is time to get on with the debate, resolve the issue, and bring private capital back to the nation’s mortgage market. Anything less would be to continue to mislead taxpayers.
