GET SMART, UNCOUPLE THE GSE AND FHA BILLS

Are the Democrats being conned in their own legislative con game?

The D’s, bless their souls, clearly want to get some immediate help to those families stuck with unaffordable subprime loans, made over the past three years, and get them into more affordable FHA fixed rate loans. They’re written legislation in the House and Senate to do so.

Democrats believe, rightly, that the more people they can help quickly, the better the federal response and the public policy. Delay hurts their effort.

Separately, the House also has approved a GSE regulatory reform bill.

White House: You Must Hurt the GSEs First

The White House, despite its rhetoric, isn’t as accommodating or willing to support the subprime mortgagors (the standard GOP line is that they entered the deals with their eyes wide-open and helping them would be a “bail out”), but the Bushies will do anything to screw Fannie Mae and Freddie Mac.

The Senate D answer to the White House FHA opposition has been to “marry” the two legislative efforts--into one bill--and try and the force the Admin to help the needy, by paying the Republicans off with the GSE hobbling proposals. If it becomes law, history likely will record this as the “Dodd-Frank Act,” in honor of committee chairmen Chris Dodd (D-Ct.) and Barney Frank (D-Mass.), but with no reference to the real author, Dick Shelby (R-Ala.).

Each day brings some Administration spokesman complaining about “problems” with the housing bill. Today it was FHA’s Brian Montgomery. Last week it was secretary Paulson saying the housing bill needs fine tuning, but their real intent is more angina for the GSEs

The Senate and House D’s keep ponying up additional GSE blood (and mortgage market efficiency and lower costs) to buy the Bush Administration’s backing for doing the right thing. The Democrats are paying a dear price to bribe the Administration to help people who deserve prompt government support.

There will be a post-subprime era, mortgage markets will return, and consumers will need familiar institutions doing familiar things at reasonable prices. Those familiar companies and processes might not be there or there in the same way, if the Senate bill becomes law. But the ever hovering large commercial banks will be. Democrats shouldn’t be so quick to poison the GSE mortgage finance well.

Punitive Senate Bill

The Senate Banking Committee approved a much more stringent anti-GSE package than passed the House. The Committee constructed their FHA plans, thanks to Sen. Shelby, by having the GSEs pick up the inevitable FHA red ink (see Montgomery’s comments from today). The Senate wrote language calling on the regulators to forbid the GSEs from raising any of their business costs to pay for this new $500 million per year effort. They also insisted on more stringent regulatory interference in the GSEs day-to-day business operations, much higher capitals requirements determined by the new regulator, "systemic risk" as a cause for regulatory action, and some additional housing mission work.

Right now, the Senate Democrats remind me of the guy at the neighborhood sale who keeps bidding against a phantom buyer. The seller says,“He just was here and is coming back and offered twice what you want to pay.” Finally, the naïve buyer succumbs to the bluff and pays three times more than anyone else would.

If the Senate Democratic leadership had any guts, they would call out the Administration, pass the FHA bill and dare the WH to veto it, an action which I believe would cost the GOP House and Senate seats in the fall elections.

D’s Benefit Politically from a Veto and Possibly Could Override It

It’s easy to envision the congressional Democrats October/November campaigns against the “heartless Republicans, who will bail out Wall Street but not the poor home owners of Main Street.” Skittish Republicans can hear it, too.

Helping subprime families is the near term need, not turning upside down the secondary mortgage market. The proposed damage done to the GSE business operations is far too high a price to pay for getting recalcitrant Republicans on board to assist people who were swept into unwise mortgage products by brokers and their Wall Street puppet masters.

The GSEs issues are not crucial, despite what the Wall Street Journal and other conservative voices claim. The current regulator now has cut back on the additional GSE capital requirements he once imposed and could re-impose them, if people really think the GSE really are risky. Like everything in the new Banking Committee bill that will cost consumers more and be reflected in future mortgage financing prices. Those factoids never get mentioned by those shaping the GSE legislation.

Democrats Being Used?

Before it is too late, will any powerful Democrat comprehend the interplay of market, profits, supply and demand, with that GSE math--specifically the additional demands each the Senate is making on the GSEs and grasp that the proverbial last straw may have been added by “my good friend, the senior Senator from the great state of….?” The Republicans and their allies are chortling at the irony of Democrats doing their dirty work and paving the way for growing commercial bank markets.

Killing the Golden Goose

Everyone claims the GSEs are the only game in the market and statistics seem to underscore that view. Yet the Senate legislation expects the GSEs to stand up and carry out their (same?) mission; buy this new loan and that new loan, yet don’t put it in your portfolio; bail out the FHA losses, give money to state housing finance agencies for rental units, but you can’t increase your costs to pay for these two items; fix this problem and that problem; post higher capital, do so with more day to day regulatory interference; and don’t run yourself as a business, even though you have shareholders who have every right to expect profits.

Democrats in the House and Senate who will go to “conference” and put together this deal obviously don’t understand how the GSEs operate or the mortgage market works.

You are doing damage, not fiddling at the margins. You are making substantive changes in how mortgage finanace is delivered to your constituents and it's not for the better.

Forget the White House. It doesn’t care about Fannie Mae and Freddie Mac because the GOP priority, since the Reagan era, just has been to hobble the two mortgage giants and this legislative package—blessed by Democrats--could well do that.

Call the GOP’s Bluff

The Democrats should prioritize these matters and promptly send a subprime relief bill to the White House ignoring the President’s threats and see what happens.

If it gets rejected and can’t be overridden, sweetening it with raw GSE meat to satisfy conservatives won’t help the broader public or future conventional mortgage financing. Eventually, it ill make matters worse.

Democrats would be better off waiting for an Obama Administration and trying to fix agreed upon problems then, without a howling Administration mob demanding GSE blood.

It’s important to remember that bad legislation—housing or otherwise--can’t happen without Democrat support.

Maloni 6-9-2008