July 28, 2013

Paying The Price For A Long And Seamy History

A reader suggested a topic on housing loans. “Will the home mortgage market ever go back to the way it was 20 years ago? Will econmic growth ever get above 2%? If not how will growing Goverment debt be paid back?”

The Washington Post. “The politics of housing finance reform are starting to get interesting. Wednesday, the Republican-controlled House Financial Services Committee passed the Protecting American Taxpayers and Homeowners (PATH) Act, which would wind down Fannie Mae and Freddie Mac and replace the busted entities with — well, nothing, pretty much. For the first time in decades, no ‘government-sponsored enterprise’ would be responsible for bundling most mortgages into marketable securities.”

“Under PATH, private investors would perform that function; Washington’s only role would be to supervise the quality of securitized mortgages. The Federal Housing Administration would remain as a source of government backing for mortgages to low-income first-time homebuyers, albeit to a more limited extent than present law allows. In short, Congress now has before it a fairly pure free-market alternative to the status quo, one that is likely to pass the House if and when the Republican leadership brings it to the floor.”

“The PATH Act opponents’ best economic argument is that reducing the supply of government-backed securities would reduce the overall depth of the U.S. financial markets, which is one of this country’s greatest advantages in the competition for the world’s supply of capital.”

“Still, politics is the least refutable objection to the PATH Act — quite simply, realtors, home builders, bankers and other housing interest groups would exercise their clout to defeat it, or anything like it. Bowing to that perceived inevitability, a bipartisan group of senators offered a bill last month that would also end Fannie and Freddie but keep government in the business of insuring mortgage securities against catastrophic losses, as long as private investors paid a fee and agreed to risk a substantial amount of their own capital.”

“Unlike the House’s PATH Act, the Senate bill has yet to make it through committee. But between the two proposals, the debate now shapes up as a contest between a nearly pure free market and a continuing role for government that is significantly smaller and more transparent than it was.”

From Barrons. “In part, Fannie and Freddie are now paying the price for their long and seamy history in Washington. No agencies of government operated in as meretricious fashion as Fannie and Freddie in the decade leading up to their demise. The companies lavished hundreds of millions of dollars in political donations and lobbying fees to literally all of K Street, and on high-paying executive appointments to leading Democratic and Republican operatives and former key congressional staffers.”

“Both companies got caught in the mid-2000s cooking their books in order to meet earnings targets that maximized executive bonuses. At the same time, they used their muscle in Congress to bully their regulators and keep their capital levels at risibly inadequate levels.”

“Their implied (now explicit) government backing of their debt allowed them to raise money at low, Treasury-like rates and then plunge those proceeds into higher-yielding risky instruments like, in the end, subprime and Alt-A securities for their investment portfolios. By the middle of the last decade, the value of these portfolios had soared to over $1.5 trillion. They were akin to internal hedge funds that supplied most of the agencies’ profits and the earnings growth so important to shareholders and bonus-hungry GSE executives. And the game worked like a charm until housing prices began their relentless decline in 2006.”

“Reform is inevitable with a reduced role for the government in housing finance. Fannie and Freddie will eventually disappear, to be replaced by the insurer FMIC and a public-financing platform open to all players. The U.S. taxpayer likewise will be far better protected than in the past. This won’t likely be good news to the proponents of a largely privatized mortgage market nor the hedge-fund managers looking to score big profits off the bailout of Fannie and Freddie.”

Investors Business Daily. “A pre-crisis bill written by Democratic Rep. Mel Watt — President Obama’s nod to run the Federal Housing Finance Agency — reveals that his ideas for regulating Fannie Mae and Freddie Mac are more radical than he lets on. On the eve of the financial crisis, Watt actually proposed the creation of the regulatory agency he now seeks to run — only, he designed it not to reform Fannie and Freddie but to pressure them to underwrite even more affordable housing, exposing them to even more risk.”

“The bill he co-sponsored with then-banking panel Chairman Barney Frank — the Federal Housing Finance Reform Act of 2007 — would have forced the federally backed mortgage giants to meet even tougher quotas for affordable lending, while contributing to an ‘Affordable Housing Fund’ to rebuild blighted urban areas. ‘The real benefit of this bill is that it will provide a big stimulus for more affordable housing,’ Watt said at the time, ignoring concerns the agencies already were overexposed to low-income loans.”

“In March 2007, Watt said he co-authored the bill to create a new regulatory apparatus that ‘will provide a means to achieve our ultimate goal of expanding the supply of affordable mortgage credit across the country.’ At the time, Watt was a senior member of the House Financial Services Committee and had just stepped down as chairman of the Congressional Black Caucus, where he’d pushed the government to boost minority homeownership.”

“His bill proposed enhancing existing federal goals boosting Fannie’s and Freddie’s low-income mortgage portfolios by adding ‘a new affordable housing sub-goal for re-financing transactions.’ The proposed regulator, dubbed ‘the Federal Housing Finance Agency,’ also would direct Fannie and Freddie to make contributions to an Affordable Housing Fund for ‘very and extremely low-income families’ in amounts equal to 1.2 basis points on each of their total outstanding mortgages — including those held in portfolio and those securitized.”

“The bill, which failed to become law, authorized the new agency to set ‘housing goals and an annual home purchase goal for’ Fannie and Freddie, and to ‘take enforcement action against an enterprise for failure to meet the housing goals.’ Proposed enforcement actions included issuing fines, cease and desist orders and even criminal penalties against Fannie and Freddie if they fell short of the social lending goals. ‘The agency,’ moreover, ‘has the authority to remove management.’”

Bits Bucket for July 28, 2013

Post off-topic ideas, links, and Craigslist finds here.