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Tags: Reuters Chadbourn Talks Housing Finance Reform

Update on So-Called Housing Finance Reform — Part II

By    |   Tuesday, 13 August 2013 12:57 PM

On Saturday, Margaret Chadbourn, the beat reporter for housing finance reform at Reuters, appeared on C-SPAN's Washington Journal to update the status of housing finance reform while Congress is resting for a month after naming quite a few post offices and inserting commemorative speeches into the Congressional Record.

Chadbourn was interviewed by host Pedro Echevarria. The interview provided an opportunity to survey the rhetoric employed by the parties to the debate, to correct some wrong thinking and to recommend an excellent article by a more experienced reporter.

The expression "so-called" is apt in this context, because both parties have been playing with this issue for years, the Dodd-Frank Act ignored it and nothing has happened since the 2008 crisis episode when Fannie Mae and Freddie Mac, soon after being declared healthy by Treasury Secretary Hank Paulson, were placed under federal conservatorship. In the meantime, they have been run since 2009 by the acting director of the Federal Housing Finance Board, Ed DeMarco. Another major element of the housing finance machinery, the Federal Housing Administration (FHA) is operating with a negative capital balance.

From the standpoint of a certified cynic, the leading actors appear to have a tacit agreement that it is in their mutual interest to make it look like they made every effort to enact housing reform legislation, but with the passage of time, they discovered two things. First, that because of the intransigence of (insert scapegoat entity here, probably Republicans), it was not possible to agree on an alternative to the current, government-dominated housing finance system. Second, that in the interim, Fannie and Freddie have recovered, so the balance has tipped in favor of retaining them and adding Well Fargo to the list of housing government-sponsored enterprises (GSEs).

The remainder of this article will set forth some observations about how the debate will unfold:

1. Timeframe. The great conservative commentator M. Stanton Evans has said: "The Democrats are the evil party; the Republicans are the stupid party. When the evil party and the stupid party get together, that's called bipartisanship."

An observer lacking in the requisite cynicism might conclude from the pronouncements of the senior members of the Senate Banking Committee and the president that an agreement is imminent, one strong enough to drag the House leadership into it. However, Chadbourn, who is manifestly not a cynic, did a service by stating that nothing is likely to happen until at least 2015.

So what is the point of all this? What is the point of the House Republicans proposing a bill without even consulting the Democrats? In the absence of any other answer, consider money. Everyone can raise a lot of money from the constituents of the Housing Industrial Complex (HIC) by putting out proposals and going through a lot of motions, all while signifying very little.

2. Refi legislation. Immediately after predicting that there would be no reform legislation in this Congress, Chadbourn brought up the prospect of legislation to help homeowners refinance their mortgages while rates are historically low, and she mentioned a potential saving of $3,000 per case, a figure also used by the president and proponents of a bill. The fact that mortgage rates have started to rise suggests that this window is starting to close.

3. Objective. A crucial component of any legislative movement must be the objective. When the host brought up the subject of Fannie and Freddie, Chadbourn responded that a stated objective is to wind down Fannie and Freddie, but this would adversely affect the availability of the 30-year, fixed-rate mortgage.

Chadbourn stated flatly that consumers want the 30-year, fixed-rate mortgage. (It is hardly surprising that Democrats and much of the industry have established the objective as maintaining the availability of an affordable 30-year, fixed-rate mortgage. As long as this is the objective, it leads directly to the perpetuation of Fannie and Freddie or similar entities with different names.)

4. Industry position. In response to another question from the host, Chadbourn observed that six months ago, no one thought anything would happen soon, but with the introduction of the Corker-Warner bill in the Senate, which proposes to wind down Fannie and Freddie, the lobbies have become engaged.

Later she added that the industry would favor bringing Fannie and Freddie back while taking steps to favor responsible home ownership over speculation. She stressed that Fannie and Freddie have been lauded by the realtors, homebuilders and mortgage companies for establishing an "ethical" system and maintaining this system would avoid upsetting the 2,000 entities that do business with the existing GSEs.

5. Why Corker? This is a nuance that will probably be better understood as the debate proceeds, but everyone refers to the Senate bill as "Corker-Warner," whereas the normal custom is to put the name of the sponsor representing the majority party first. Why the departure? It probably goes back to what Stan Evans said about the Republicans being the stupid party. If all this blows up, it could be useful for the Democrats in the Senate and the White House to have this doomed project named after Sen. Bob Corker, R-Tenn.

In conclusion, as with the Dodd-Frank Act, which was supposed to end "too big to fail" but instead provides a roadmap for the continued growth of the zombie banks under the federal umbrella/safety net, the Corker-Warner proposal, advanced in the name of unwinding the GSEs, will probably end up rewinding them, but this time with an explicit guarantee supposedly backed by private capital, with the guarantee only coming into play in case of a "catastrophe."

If interest rates continue to rise, with or without the unwinding of the Federal Reserve's bond-buying program, perhaps the legislators will realize that this country is still in the crisis of 2008, and a spike in interest rates could pose another systemic threat.

The overriding reality is that throughout the decades of the financial crisis, accompanied by a series of landmark statutes to make sure this would never happen again, nothing has ever been done to contain the risk that a sudden "liquidity event" can bring down the global financial system at any time. Instead, the focus is on how to restore confidence in a system that has already failed, so that the fees can flow once again, while the risks are laid off on the government.

(An excellent article by Gretchen Morgenson of The New York Times titled "The Housing Market Is Still Missing a Backbone," Aug. 10, 2013, can be found here.)

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On Saturday, Margaret Chadbourn, the beat reporter for housing finance reform at Reuters, appeared on C-SPAN's Washington Journal to update the status of housing finance reform.
Reuters Chadbourn Talks Housing Finance Reform
Tuesday, 13 August 2013 12:57 PM
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