To commemorate the ten-year anniversary of the $187 billion taxpayer bailout and government takeover of the two Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, the House Committee on Financial Services held a hearing last week analyzing how Congress has failed to enact comprehensive housing finance reform. As a result of Congressional inaction, taxpayers remain on the hook for trillions of dollars in obligations and these entities continue to engage in the same shrouded activity and high risk behavior that got them into the mess they’re in today.
In his opening statement, Committee Chairman Jeb Hensarling (11-time winner of NTU’s “Taxpayers’ Friend Award”) cut right to the chase, saying:
“Embarrassingly, ten years later, the GSEs remain in conservatorship, very much alive and very much unreformed as they quietly return to their pre-crisis market dominance. That’s bad news for competition, innovation, and, most of all, taxpayers, since the Congressional Budget Office has said their $5.1 trillion of mortgage obligations are effectively guaranteed by the federal government.”
Chairman Hensarling is right on the money. Today, the GSEs’ stake in the housing market is greater than ever, with taxpayers backing nearly 90 percent of U.S. mortgages compared to just 50 percent in the years leading up to the housing crisis. Thankfully, the Committee focused on the need for meaningful reform, and NTU strongly believes that the issues that were discussed can positively contribute to building a foundation for serious reforms to the GSEs and get them off the backs of taxpayers.
The key takeaway from last week’s hearing is the announcement of two pieces of legislation that would impact the government’s dominance in the market. The first proposal is the Protecting American Taxpayers and Homeowners (PATH) Act, which was first introduced in 2013 and is a bold and comprehensive plan to wind down the GSEs and significantly reduce government and taxpayer backing from the housing finance market. NTU was pleased to endorse the PATH Act when it was first introduced. The second option is a bipartisan plan that is less robust and still in the planning stages. This second plan reduces taxpayer exposure in the mortgage market but does have some flaws. At the moment only a discussion draft has been unveiled and NTU is still examining the potential impacts it could have on taxpayers.
Members and witnesses delivered praise and criticism of the government’s actions in the decade since conservatorship began. The most significant development while in conservatorship has been the credit-risk transfer (CRT), a move which NTU has cheered as it moves mortgage risk from the balance sheets of the government and onto the private market. While the $49 billion in CRT is great news, unfortunately it only amounts to one percent of the GSEs’ holdings and these assets are generally among those of the least risk in the GSEs’ portfolios, leaving taxpayers with some of the more precarious positions.
Sadly, the negative changes far outnumber the positive changes under conservatorship, which should concern taxpayers.
Chief among these concerns are the GSEs’ expanding activities, which add risk to their taxpayer-backed operations. These concerns are evident in the launch of Freddie Mac’s new Integrated Mortgage Insurance (IMAGIN) pilot program, which gives favored treatment to some insurers who do not have to follow the same standards as private market actors normally must follow in order to do business with Freddie Mac. NTU believes this is just another attempt by these entities to push out private capital from yet another part of the market in order to gobble up market share.
While they are large players in the multifamily home loan market (about 40 percent of all loans), the GSEs received a lot of criticism for their decision to test entry into the single family rental market. After blowback from private firms, which were providing excellent liquidity in this area on their own, last month Fannie and Freddie decided to end this practice and continue operating in their lane.
Even though it was not discussed at the hearing, a complete lack of transparency at the FHFA remains a central concern for lawmakers and outside groups looking to keep these entities in check. The aforementioned IMAGIN program, for example, was not open for a public comment period -- which keeps outside stakeholders like taxpayers and mortgage insurers in the dark. In addition, controversies over wasteful spending at these institutions frequently make the news - specifically at the new headquarters of Fannie Mae where costs have risen dramatically due to new extravagant features. Also unexplored at the hearings -- but still vitally important -- are the dangers associated with allowing less-rigorous credit scoring standards to permeate GSE procedures. Lawmakers and regulators must take caution against introducing credit-scoring changes that could encourage rate shopping, precipitate moral hazard, and lead to even more liabilities backed by taxpayers.
Looking ahead, while it is unlikely that any comprehensive housing finance reform legislation will be enacted into law, there will be monumental shift at the FHFA in the coming months due to Director Watt’s expiring term at the end of this year. This vacancy is a prime opportunity for the Trump Administration to nominate a FHFA director who will prioritize the interests of taxpayers and the private market ahead of government. It is vital that the President nominate a director who is dedicated to transparency, committed to a sound credit score system rather than the use of other less trustworthy scores, and dedicated to reining-in Fannie and Freddie’s ever expanding operations.