Wednesday, the American Enterprise Institute hosted a book forum for James Hagerty on his new book titled “The Fateful History of Fannie Mae.” The book chronicles the process of the politicization of mortgage finance by Fannie Mae and its sibling Freddie Mac in the decades since the Federal Housing Administration (FHA) and Fannie Mae were created by the Roosevelt administration to prime the pump for the housing industry during the Great Depression.
The book includes vignettes of the personalities who dominated housing policy along the way and documents the course of the booms and busts that have marked the housing industry according to the availability of financing at any given time in the business cycle. The powerful lobbies associated with the housing industry have complained that whenever the business cycle called for an increase in interest rates, the housing industry would suffer. What they needed was a mechanism for ensuring that there would always be “a steady flow of funds to housing.” Fannie, Freddie and the FHA were the answer to their prayers. The FHA insured mortgages directly, whereas Fannie and Freddie issued guarantees that were supposed to be only implicitly backed by the government.
There were threats from time to time to reform Fannie and Freddie and reduce the government role in housing, but each time, the industry, growing more powerful with each economic cycle, rallied, and successive administrations of both parties could not resist the temptation to press for ever greater commitments by Fannie and Freddie to expand home ownership.
Under the Clinton administration, Housing and Urban Development Secretary Andrew Cuomo committed to create 28.1 million new homeowners, allowing the administration to take credit for lifting millions of people out of poverty, thanks to the growth of the equity in their homes.
Lending standards were progressively loosened, and when losses mounted due to mortgage defaults, Hagerty says, the Chinese authorities started calling Treasury Secretary Hank Paulson, who had a long history with China from his days as CEO of Goldman Sachs, demanding that the U.S. government back the debt of Fannie and Freddie. Both companies were placed under conservatorship, and they now control 90 percent of the mortgage market, all backed by the federal government.
When the Dodd-Frank Act was under consideration in 2010, the Obama administration studiously avoided making any proposals to reform Fannie and Freddie, limiting its activity to submitting a set of three options, the most prominent of which appeared to set the stage for the reincarnation of Fannie and Freddie in substantially their present form. The Housing And Economic Recovery Act provides that if nothing is done, Fannie and Freddie will remain in place, and the industry appears determined to run out the clock.
The main policy change promoted by the industry is that under a reformed system, the guarantees for Fannie and Freddie would be explicit, not implicit. There are some calls for combining Fannie and Freddie into a single entity, and there is some evidence that Wells Fargo aspires to become a dominant player in mortgage finance, and as one of the Too Big To Fail banks, it is already empowered to borrow cheaply with the backing of the federal government.
Thus, the outlook is for evolutionary change in the housing finance system so that it will end up looking much as it has for many decades. Hagerty’s book helps readers grasp the inevitability of this result.
CFTC Meeting Cancelled
The meeting of the Commodity Futures Trading Commission (CFTC) scheduled for Thursday to consider a proposed rulemaking on enhancing protections afforded customers and customer funds held by futures commission merchants and derivatives clearing organizations mandated by the Dodd-Frank Act was cancelled.
This is no surprise, because for months, Chairman Gary Gensler has been unable to convene the Commission because he is unable to produce the votes necessary to proceed with the agenda he has committed to complete in order to implement Dodd-Frank.
Thus, farmers, ranchers and other customers of firms that administer hedging instruments will have to wait longer for protections they took for granted to prevent firms from converting customer funds to their own use.
The rule was supposed to be a counterpart to a recent proposal by the Securities and Exchange Commission that applies to broker-dealers and security-based swaps.
Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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