Tags: GSE | Fannie | Freddie | Watt

House Financial Services Committee Wallows in Housing Finance

By    |   Wednesday, 28 January 2015 09:02 AM

The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing Jan. 27 titled "Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency."

The hearing kicks off the latest chapter in the incessant debate about how to resolve the fate of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) established to finance the housing industry through the issuance of mortgage-backed securities. This financial structure collapsed as part of the 2008 episode in the ongoing, permanent financial crisis, but the ideology and interest-group constellation that supported it, which this writer has dubbed the Housing Industrial Complex, remain in place.

Last year, the Senate Banking Committee reported a bill that was supposed to reform the GSEs, but the full Senate never considered the bill. Now that both houses of Congress are in Republican hands, it looks like both congressional banking committees will take up the challenge of trying to solve this perennial problem.

The hearing introduced three of the leading players in the scenario that is about to unfold: Hensarling; Democratic Ranking Member Maxine Waters of California; and Melvin Watt, a former senior member of the committee who was installed last year as director of the FHFA. The Obama administration succeeded in installing Watt as a regulator much friendlier to the mission of the GSEs than was the career civil servant Edward DeMarco, whose final act was to defy demands by Democrats in Congress that the agency facilitate principal write downs of underwater mortgages from the mortgage bust.

Hensarling began his opening statement with a well-worn but apt quote from the philosopher Yogi Berra that it is "deja vu all over again." He accused "Washington's ruling class" of repeating the same mistakes, and he blamed the 2008 episode on "dumb regulation" that fostered the financing of mortgages for people who could not afford them, 70 percent of them backed by federal agencies. Hensarling attacked both Wall Street greed and Washington greed and took the opportunity to quote Obamacare architect Jonathan Gruber's observation that "The American people are too stupid to know the difference."

Hensarling accused Washington policymakers of "rolling the dice again" through three policies now being promoted by the FHFA: 1) suspending previously scheduled increases in fees charged by the GSEs, thus increasing the leverage of mortgage loans; 2) authorizing Fannie and Freddie to buy mortgages with down payments as low as 3 percent, at the expense of prudent underwriting standards; and 3) diverting government funds from Fannie and Freddie to provide "slush funds" for affordable housing programs. Hensarling declared that it is "time to get off the boom-bust cycle" and to grow the economy so that Americans can afford their mortgages.

Waters praised Watt as the colleague she could most count on to read every line of every bill and to work out differences with Republicans. Waters argued that the GSEs have paid back $38 billion more than they borrowed from the government and that the bailout has been "a resounding success." She accused the Republicans of proposing to close the GSEs without putting in place a viable alternative, thereby causing another recession. She praised Watt for fulfilling the agency's mandate "to preserve a liquid, competitive and national housing market."

In his testimony, Watt gave a thorough and relatively succinct presentation of his agency's extensive activities in furtherance of the agency's three strategic goals: 1) MAINTAIN the national housing finance markets; 2) REDUCE taxpayer risk by increasing private capital; and 3) BUILD a new single-family securitization structure for the national mortgage market.

This writer has coined the slogan "Semper Fannie and Freddie" to recognize the determination of the proponents of a government-dominated mortgage market to keep the GSEs in place and restore a system modeled after the one that collapsed. This is not a case of repeating the same mistakes and expecting different results, but rather a recognition that the system worked well for an industry that prospered without investing significant capital of its own. With an able leader in place and the backing of the administration, GSE backers are well-positioned to employ the tactic made famous by the legendary North Carolina basketball coach Dean Smith and run out the clock.

(Archived video can be found here and prepared testimony can be found here.)

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The House Financial Services Committee, chaired by Rep. Jeb Hensarling, R-Texas, held a hearing Jan. 27 titled "Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency."
GSE, Fannie, Freddie, Watt
Wednesday, 28 January 2015 09:02 AM
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