Tags: House | mortgage | banking | GSE

House Committee Shadowboxes Over GSE Reform

By    |   Thursday, 13 Jun 2013 01:58 PM

The House Financial Services Committee held its tenth hearing on so-called GSE reform, entitled "Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees." Government-sponsored enterprise (GSE) reform is a popular topic because it involves all of the interest groups in the Housing Industrial Complex and because a lot is at stake in this issue that was pointedly ignored by the Dodd-Frank Act in spite of the prominent role played by toxic mortgage-backed securities in causing the 2008 episode of the ongoing financial crisis.

Five expert witnesses gave better-than-usual testimony, but at the same time the hearing provided further evidence that Congress is not going to be able to do anything but reinvent, in the name of reform, the same practices that led to the events of 2008.

Perhaps the hearing should have been called a "talking," because at times it appeared that the members were not interested in listening to the answer to the questions they asked, evidently at the behest of favored interest groups. At one point, Al Green, D-Texas, demanded to know whether the ideas presented by the panel had been passed on by the bankers, realtors and homebuilders, and only the Democratic witness could confirm that indeed his ideas were shared, if not cleared, by the leading industry lobbies.

Thus, the committee continues to look for answers from the very same groups whose policies have wrecked the financial system over the past four decades.

Another challenge to the credibility of any reform effort is posed by the mysterious role of Gary Miller, R-Calif.

Readers may recall in the last Congress, David Schweikert, R-Ariz., then a freshman congressman but a veteran realtor, was installed as vice chairman of the full committee. Why the committee needs a vice chairman and why a freshman with close industry ties would appear in this role seemingly out of nowhere is a question. Ultimately Schweikert lost not only his vice chairmanship but also his seat on the committee in a row with the House leadership over alleged lapses in party discipline.

So this year, Miller, a developer with close ties to Fannie Mae and Freddie Mac and one of the leading opponents of reform, has acceded to that role. I intend to pursue the question, but the working hypothesis must be that the position was created as a magnet for contributions from the real estate industry. By the way, each subcommittee has also sprouted supernumerary vice chairmen. In the past, it was understood, with a minimum amount of fuss, that if the chairman were unavailable to preside at a given time, the next senior committee member would take the chair temporarily.

More pertinent is the question of how credible the professed dedication of Chairman Jeb Hensarling, R-Texas, to GSE reform can be when the leadership has evidently installed a keeper who is dedicated to maintaining a strong role for the GSEs as entities that will not merely be implicitly backed by the federal government but fully nationalized, the better to serve the mortgage finance industry. This suspicion is heightened by the fact that House Speaker John Boehner, R-Ohio, comes from the delegation with the closest ties to the GSEs.

But we digress. This hearing stands as an example of the importance in any legislative effort of defining the objective. In his opening statement, Hensarling defined the objective as finding a way to resolve the role of Fannie Mae and Freddie Mac so that they would no longer dominate the mortgage market nor pose a systemic risk to the economy.

In contrast, the ranking Democrat, Maxine Waters, D-Calif., while agreeing that some reform is needed, insisted that whatever changes are adopted must preserve the availability of the 30-year fixed-rate mortgage, with no prepayment penalty, and it must be observed that at least some Republicans, including Miller, agree with her.

The theme of the hearing, one that has been trotted out before, was that by examining the experience of other industrialized countries, particularly in Europe, one could learn valuable lessons. Two of the witnesses, Michael Lea and David Min, effectively challenged this idea by pointing out that to the extent that European nations do not explicitly guarantee mortgages, it is because they rely more on banks than on agencies like GSEs to finance housing.

Min argued that each country's arrangements are intertwined with the cultures of the respective countries, so that it is difficult to draw clear conclusions by comparing the stated features of their housing finance programs.

The following are key points of the five witnesses who testified:

1. Dwight Jaffee, professor of banking, finance and real estate at the University of California, Berkeley. Jaffee asserted that the private sector is "fully capable" of operating the U.S. mortgage market, as it did between 1950 and 1990, and as the performance of the "jumbo" market demonstrates today. He ascribed the long-term, fixed-rate mortgage to Depression-era intervention, with mortgage investors bearing the burden.

2. Michael Lea, director of The Corky McMillin Center for Real Estate at San Diego State University. Lea called the long-term, fixed-rate mortgage "the centerpiece of the U.S. mortgage market," but it is "not a natural product," and exists only with government support. He recalled that the savings and loan industry went bankrupt in the 1980s because it was required to concentrate in this product.

He agreed with Jaffee that the private sector could provide this product, but added the caveat that lenders must hold "meaningful capital." (I doubt that the lenders will do this over time; rather the industry will continue to be subject to periodic bailouts.)

3. Alex Pollock, resident fellow at the American Enterprise Institute. Pollock pointed out that the U.S. housing finance system has collapsed twice in the last 30 years, and he dismissed the industry's claim that it is the "envy of the world," as well as the idea that it can produce a higher home ownership rate.

He warned that the GSEs have enhanced their monopoly power through loopholes granted by the Consumer Financial Protection Bureau and assets purchased by the Federal Reserve. Pollock called for Fannie Mae and Freddie Mac to be deprived of their status as GSEs.

4. Lawrence White, an economics professor at New York University. White charged that people have bought more house than they should have, due to government subsidies, and that the broader economy has suffered as a result. Worse still, a lot of the subsidies have gone to higher-income households.

He advocated that subsidies be provided directly and on budget through agencies like the Federal Housing Authority and Veterans Affairs and targeted to low- and moderate-income borrowers. White agreed with most of the other panelists that the long-term, fixed-rate mortgage could continue to be offered, by employing such as depositories, covered bonds and institutional purchases of mortgage-backed securities.

5. David Min, assistant professor of law at the University of California, Irvine. Min's main point was that the major industrialized countries all support housing finance, but they do it through different means, and the European Union "doesn't even let dry cleaners fail." He cautioned that covered bonds, as employed by Denmark, often cited as a model, pass credit risk on to other government-back entities, such as "to big to fail" banks.

He recommended that the government continue to support long-term, fixed-rate mortgages through the GSEs, much as it does now. (My view is that regardless of all the chatter about reform, this is what is actually going to happen; Fannie Mae and Freddie Mac will be restored to their oligopoly power, augmented by Wells Fargo, and backed by an explicit, rather than an implicit, government guarantee.)

Press reports indicate that an effort is under way by the Senate Banking Committee to develop a GSE reform bill that will be sponsored by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn. Expectations that real reform will emerge from this initiative should be low, but that committee is also bound to hold extensive, if not exhaustive, hearings that will be reported in this space.

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Robert-Feinberg
The House Financial Services Committee held its tenth hearing on so-called GSE reform, entitled "Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees."
House,mortgage,banking,GSE
1333
2013-58-13
Thursday, 13 Jun 2013 01:58 PM
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