Senators: Do No Harm!

Pucker Time

If you listen to some in the chattering class, this week in GSE-land will feature a lot of tight sphincters as the companies’ fates could be decided by the congressional Democrats in power and the Bush Administration, which is a supplicant on the issue of dramatically jacking up GSE capital and regulation.

The companies and their allies (they still have allies, don’t they?) are worried about all sorts of horrible things happening to them and none look mission or business helpful.

Fannie Mae and Freddie Mac seem most concerned over the possible Senate resurrection of a provision--overwhelmingly knocked out in the House--that would give a new ugly regulator unbridled authority to set new capital requirements anywhere it chose and to maintain them for any reason under the sun, related or unrelated to GSE events.

In their chamber, House Financial Service Committee members Melissa Bean (D-Ill.) and Randy Neugebauer (R-Tex) led a highly successful floor effort (bipartisan vote of 386-33) to kill this new capital setting authority, for which the Bush Administration still longs.

The GSEs fear that Sen. Richard Shelby (R-Ala.) will raise it anew and/or try and utilize it as a bargaining chip in a grand construct of a multi-provision bill which Committee Chairman Chris Dodd (D-Ct.) and others could fashion.

If the Senate D’s cuddle with the White House and accept the Shelby “nail the GSEs to the wall” demand, the thinking is that House Banking Chairman Barney Frank (D-Mass.)--who initially approved the capital provision, before it was kayoed on the House floor--willingly will accept it “in conference” on behalf of his friend, Treasury Secretary Henry Paulson.

If this proposal ever became law, the GSEs could find themselves in an unprecedented capital and regulatory box. Frank might seek this result despite the fact that his colleagues specifically rejected it by a margin of more than ten to one.

Have the GSEs Been Abandoned?

If any of the GSE fears are real, not just the normal “what ifs” which occur before legislation is marked up, one has to ask why Fannie and Freddie might be forgotten by their Hill allies, those who so long have supported them and so long have watched their constituents benefit from the companies market presence.

The answer could be that the Hill has just OD’d on the GSEs and their issues. Everyone involved easily could find some reason real or imagined to turn a deaf ear to the companies, especially since the Administration, the Wall Street Journal, now the Washington Post, the conservative think tanks, some trades, and the large PAC-heavy commercial banking community, all are singing to the Congress the same “Fix the GSEs” siren song. That alone should alarm somebody! (Of course, there always are those 386 House D’s and R’s who might agree with the GSEs, since—on the day the bill passed the House--they recorded their opposition to what Barney might be asked to accept despite their voted objections!!)

The past eight years of Bush appointees trying to scuttle the very GSE companies they regulate, however, should give Congress some reason to pause. This same era also provides Congress with a glimpse as to why the GSEs always opposed unbridled OFHEO regulatory authority over capital, new products, mortgage investments, etc.

The mortgage giants understandably want Congress—whose constituents most benefits from the GSEs success and their efficiency—to have some word in proposed draconian regulatory moves. But, it’s this capital discretion that the Congress would cede, if the Bush Administration, Shelby, et al prevail.

Unprecedented Authority

No financial regulator in Washington has this authority to set capital and to increase it, for any reason under the sun, and to keep that rate at new levels until he or she ever decides to rescind it. But that’s what the Admin wants for Fannie Mae and Freddie Mac.

Why is this necessary with the GSEs? They haven’t and can’t be blamed for the subprime mess. Quite the contrary. Fannie Mae and Freddie Mac were the only major investors which stayed in the markets, despite the fact that using existing authority, the Office of Financial Housing Enterprise Oversight, (OFHEO), had tacked on a 30% capital hit; in addition to the statutory risk based capital each company has to hold. That’s like the referees forcing your star quarterback to play the game wearing a 20 pound barbell on his throwing arm.

For more consecutive quarters than I can recount, OFHEO also has monthly reiterated that the GSEs have sufficient capital to do their mission work.

And, until OFHEO recently backed off the demand because of the craziness of the mortgage market, Fannie and Freddie still were trying to invest 55% of all of their business in low, moderate and middle income housing finance. Something they have largely done for most of the past 15 years and which no other mortgage investor comes anywhere near matching.

What problems will this new regulator fix that the old one can’t overcome?? Or is it that both chambers are so far along saying that “a new GSE regulator is necessary” that they can’t distinguish between regulatory incompetence and the need to start all over again?
There is a cost to excessive capital and operational interference. Most in Congress can’t fathom what the new capital figures portend or understand how the nation’s traditionally well run and efficient (if you can ignore the subprime excesses) mortgage finance system works or how their actions could injure the very families which sent them to Congress to look out for their interests.

The jihad against Fannie and Freddie, dating to the Reagan presidency, always has been designed to increase the firms’ business costs and stifle the standardization/efficiency they foster. It has been driven by ideological Conservatives, who claim that the GSEs are systemically risky and that the commercial banks and other mortgage investors can do a better job.

Demand for GSE Help is Growing not Shrinking

In recent months, Fannie Mae and Freddie Mac, which traditionally owned or guaranteed 25% of all US mortgages written, now handle 50% or more of that shrinking number— meaning the primary market lenders is using them even more. (The New York Times today reported that the GSEs are buying or securitizing 80% of all loans going into the secondary mortgage market.) Yet OFHEO insists on burdening the two companies with capital requirements and investment and product limitations never seen in the GSEs’ histories.

This is but a shadow of the unconstrained authority that Republicans want the Democrat-controlled Congress to take out of statute and give to a de novo regulator, just as the nation tries to dig its way out of an unprecedented real estate debacle, with no undos, redos, “snapbacks,” or anything that would put a governor on a GSE regulator’s “gone wild” performance.

I can’t understand why the Democrats would do this rationally or politically.

The United States cannot rely on the nation’s large commercial banks to suddenly do what Fannie and Freddie have done and can do. The banks either don’t have the stomach or the charter to do that work, which involves exclusively investing in mortgage finance—not myriad lines of commercial debt—and favoring long term fixed rate financing, which most consumers want but few banks and other lenders favor or promote, especially if they can hustle their customers with adjustable rate loans. The banks can provide some type of mortgage market but nothing as low cost or comprehensive as that which the nation has enjoyed.

The GSEs current degree of market penetration should cause every Senator and Congressman to make sure that he or she understands just how their Fannie/Freddie actions will impact the mortgage market since so many of their constituents will be directly impacted by what the Congress does.

The Democrats in Congress—who must bless this pact, if it is to be sent to the President-- should take a long time to sit down and satisfy themselves that they know how a GSE-limited domestic mortgage market would work, with all of the capital increases and company discretion limitations Shelby et al want for Fannie and Freddie? Who holds the debt and mortgage assets, who gets what money, and what will consumers receive and pay?

If the D’s like what that housing future holds then they should willing to stand up and say, “We Democrats are going to restructure the secondary mortgage market and believe that changes we make are better for consumers than what they have now. Our party agrees with the Bush Administration and will stand behind these changes and deal with any consequences!”

If they don’t like the picture, then they shouldn’t follow Pied Piper Shelby or the Administration.

Solving Problems that May Not Exist


If Congress backtracks (remember the capital authority in question was soundly defeated in the House) and approves this language, I believe that it will have given into a GSE lynch mob and produced a solution in search of a problem.

But, hey, that’s not the Hill’s dilemma. The Congress legislates. Congress may feel that the prices of everything are going up, including food, gasoline, education, health care, so who’s going to notice some price increase or inefficiency in the mortgage markets??

It’s no accident that in the past few weeks given international mortgage problems two European countries have discussed creating their own Fannie and Freddie. The secondary mortgage market model works.

Maybe Congress just should do a 180 degree turn and narrow it’s scope and not create a new GSE regulator, but add significantly to OFHEO’s work force and make sure that the people who toil at the agency are up to the job, don’t have major political agendas, and haven’t already signed up with those who stand to benefit financially if Fannie and Freddie are turned into regulated utilities.

OFHEO, properly managed and overseen, given more resources appropriately deployed, finally might be able to do whatever job the Congress wants done, especially if its ugly partisan teeth are pulled.

Maloni 5-6-2008