Tags: Tester | Johanns | housing | Senate

Sens. Tester and Johanns Back Big Government Housing Finance

By    |   Wednesday, 24 July 2013 02:22 PM

On July 23, the Senate Banking Committee's Subcommittee on Securities, Insurance and Investment, chaired by Jon Tester, D-Mont., held a hearing titled "Creating a Housing Finance System Built to Last: Ensuring Access for Community Institutions."

The purpose of the hearing was to make the case for rebuilding a system for enabling community-based institutions to sell mortgages into the global secondary market, supposedly in a safer manner than the system that broke down along with the housing bubble in the late 2000s.

Witnesses were an official of the Federal Housing Finance Agency (FHFA), the failed regulator of the failed housing government-sponsored enterprises (GSEs), namely Fannie Mae and Freddie Mac, and their troubled sibling, the Federal Home Loan Bank System (FHLB), followed by a panel representing four of the lobbies whose members would benefit from this scheme.

It is perhaps unfortunate that the committee no longer follows the practice of posting the opening statements of at least the chairman, so that citizens can conveniently read them rather than having to find them on the archive and listen to them linearly. If readers wish to hear the statements, a tip is that they should scroll about 15 minutes into the tape and then watch first Chairman Tester and then the ranking Republican on the subcommittee, Mike Johanns, R-Nebr.

This article will introduce some of the players in the drama, or bad high school play, that is about to unfold as the Senate finally prepares to take up the issue, totally neglected by the Dodd-Frank Act, about how to respond to the dramatic failures of the GSEs and the insolvency of the Federal Housing Authority.

Tester and Johanns enjoy reputations as fairly mainstream senators, but a careful reading of their words at this hearing reveals something else entirely about them and about the Senate itself.

These two senators are part of the bipartisan group of eight, led by Bob Corker, R-Tenn., and Mark Warner, D-Va., (ironically it is usually the Republican who gets top billing) who have cosponsored legislation to create what they claim is a new, improved housing finance system that would correct the flaws in Fannie and Freddie and enable lenders and all of the other participants in the chain of causation of what passes for housing finance, to restore the flow of fees that nourishes the Housing Industrial Complex.

The specific role of Tester and Johanns is to act as guardians of the ability of "community-based financial institutions," such as small banks and credit unions, to participate in the business and not be crowded out by the "too big to fail" banks that dominate it. The purpose of this hearing is to dramatize the "critical" importance of giving this segment of the financial lobby what it wants through the medium of political theater, or maybe the theater of the absurd.

Among the witnesses, Sandra Thompson, a deputy director at of the FHFA, is evidently not senior enough at the agency to answer the policy questions put to her by the subcommittee. Several times she demurred and said the answers would have to come from someone at a higher pay grade.

However, she refused to be railroaded into endorsing the 30-year, fixed-rate mortgage as essential to retain in any reform, saying she would not endorse any specific product.

On the industry panel, there were, as usual, two community bank representatives, because there are two competing lobbies, the Independent Community Bankers (ICBA), and the mainline lobby, the American Bankers Association (ABA), which likes to present itself through community bankers rather than the likes of JPMorgan Chase CEO Jamie Dimon.

The ICBA witness stressed the importance of having access to the secondary market as a place to sell loans to mitigate risk. He supported the provision of a layer of private capital and third-party guarantors to protect taxpayer interests. He also warned against turning the secondary market over again to the too big to fail banks whose sloppy underwriting fueled the 2008 episode of the ongoing financial crisis.

Interestingly, the ABA witness moved immediately to attack the competing Farm Credit System, not otherwise mentioned in the hearing, "which continues to follow the discredited model of privatized gains and socialized losses which failed so badly in the housing sector." The witness took the occasion to restate the banking industry's opposition to having to conduct non-banking operations, such as securitization through a separately capitalized entity. The ABA complains that this is an onerous requirement to impose at the same time the industry is required to raise its capital levels. (The import of this seems to be that the banking industry wants to maintain the same "discredited model" it associates with the Farm Credit System.)

For me, the overriding issue is whether this bipartisan proposal is anything but a fast shuffle of the existing players and models underneath a cosmetic veneer of private capital and sold under the slogan of "This Time Is Different."

In the opening statements referred to above, Tester declared, "As we look to the future and consider what our system of housing finance looks like, we must ensure that these institutions can continue to access the secondary market and that [they] aren't crowded out of the market or forced to access it through their larger competitors."

Johanns followed with this statement: "While many small institutions do, in fact, originate loans and hold them on their balance sheet, today's volatile interest rate environment can make that a risky proposition. Access to the secondary market is a necessary tool to mitigate that risk, and we have to figure out a way to maintain it."

I would warn, "Beware! While the senators are figuring it out and shuffling the pieces, the risk could once again end up in a place where it will not be found until another crisis episode occurs and is covered by another bailout, probably through a hidden trap door, so that the taxpayers will be stuck yet again."

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On July 23, the Senate Banking Committee's Subcommittee on Securities, Insurance and Investment, chaired by Jon Tester, D-Mont., held a hearing titled "Creating a Housing Finance System Built to Last: Ensuring Access for Community Institutions."
Wednesday, 24 July 2013 02:22 PM
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