Earlier this week the Senate Banking Committee held a hearing examining the condition of Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSEs). Prior to the hearing, NTU was pleased to submit commentary to members of the committee about the need for housing finance reform and the taxpayer implications of mission creep from the GSEs. At the hearing, senators listened to testimony of Mel Watt, Director of the Federal Housing Finance Agency (FHFA), which oversees the GSEs, about plans to release these entities from taxpayer-backed conservatorship, as well as questionable practices that they have undertaken. To say the least, much work remains to reform these entities and get them off of taxpayers’ balance sheet.
Committee Chairman Mike Crapo (R-ID) cut right to the chase in his opening statement, saying “the overall trends I am seeing toward greater taxpayer risk and greater government presence in the mortgage market are concerning.” The Chairman is completely correct. Today, Fannie and Freddie hold virtually no reserve capital and guarantee $5 trillion in mortgage loans, just about as much as they did in the run up to the great recession. With no capital to withstand even a small market downturn, it greatly increases the probability of taxpayers needing to infuse them with even more capital. NTU has long written about the dangers these entities pose to taxpayers, which is why we continue the urge the committee to embark on comprehensive housing finance reform that completely removes the prospect of a future taxpayer-funded bailout.
Little has been done over the last decade to diminish the role of Fannie and Freddie in the housing market, and NTU contests that some of their actions have expanded outside of the scope of their charting purpose. This sentiment was echoed by Sen. Bob Corker (R-TN), who argued “instead of trying to decrease the footprint over time, over the last fives years, you are beginning to expand the mission.” The evidence of mission creep is evident in the launch of Freddie Mac’s new Integrated Mortgages Insurance (IMAGIN) pilot program which shares the risk of low down-payment mortgages with private investors. Concerningly, IMAGIN gives favored treatment to some insurers who do not have to follow the same standards as private mortgage insurers must in order to do business with Freddie Mac. This program, which is steeped in secrecy, and was not subject to a public comment period, has very few details about its operations or capital standards. The potential to increase the chance of a future taxpayer bailout is therefore greater.
While NTU has been critical of FHFA and their expansion of government influence in the housing market, we praise Director Watt for his perspective on the allowance of alternative credit scores at the GSEs. Just a few months ago FHFA sought the public input on a proposal that would allow new credit score models to be used at FHFA for some homebuyers. NTU led a letter to FHFA expressing concern about such a move. While competition in providing customer services is generally a valuable thing, artificially forcing alternative models into this complex space has the potential to create a ‘race to the bottom’ effect on our nation’s housing finance system, which could set the stage for a housing crisis and possibly a taxpayer-funded bailout. When Director Watt was asked about alternative credit scores at FHFA, he responded, “We had concerns about it initially because credit scoring is one of those things where competition is good if you’re competing on the right things, but if you’re competing just to get more business in the credit scoring arena, that’s not a good thing.”
Despite some pessimism in Washington at the prospect of GSE reform happening in 2018, NTU will continue to advocate for housing finance reform that protects the interests of taxpayers. Furthermore, it is fundamentally unfair for government to confer advantages and protections upon entities that can then, as a result, expand their competitive position and influence. In the interim, basic transparency, oversight, and limitations on the GSEs’ missions are fundamental to protecting taxpayers from poorly crafted policy and wasteful spending.