With the federal government swamped in $21 trillion of debt that grows deeper by the day, Washington needs to get serious about stamping out irresponsible expenditures wherever they occur. Congress has a responsibility not only to hold executive branch officials accountable for their own agencies’ wasteful policies, but also to ensure that federally-chartered entities are being properly overseen on a day to day basis. A recent report indicates that taxpayer-backed housing giant Fannie Mae is spending lavishly on its new headquarters, which means it’s time for the watchdogs to get some exercise.
Fannie Mae, a Government-Sponsored Enterprise (GSE), is a housing-finance entity that was in the thick of the 2008 financial crisis. A combination of bad policies, like affordable housing goals for low income homebuyers and lower credit standards for subprime borrowers, created a housing bubble that had a big part in decimating the economy. While receiving a taxpayer-funded bailout of more than $100 billion, Fannie was essentially nationalized under the Federal Housing Finance Agency (FHFA), where it remains to this day. Since the government still controls Fannie, taxpayers remain on the hook for their guarantees, even as the Treasury treats the GSE like an ATM.
Given these very short strings, how Fannie and its twin Freddie Mac conduct their business (and their spending) matters to taxpayers, even though in a more ideal setting the companies’ shareholders ought to be the final arbiters of what’s appropriate. That’s why NTU is concerned about the skyrocketing costs for Fannie’s new headquarters.
After receiving an anonymous tip about some questionable building purchases, the FHFA Inspector General launched an official investigation and taxpayers should be concerned with the results. The Office of Inspector General (OIG) report notes that the FHFA official in charge with overseeing the project was effectively asleep at the switch and unaware of rising costs. Because of this, OIG believes that the “projected cost of the buildout presented significant financial and reputational risks that warranted ‘immediate, sustained, and comprehensive oversight’ from FHFA.”
The report discovered nearly $32 million in outlays for extravagant features. These include $7.7 million for interior finishes and detailing ($2.5 million for wood veneer, $1.2 million for decorative wood panelling, $750,000 for decorative tile, $540,000 for gypsum ceiling details), $4.1 million for a cafeteria that is likely to be “underutilized”, $2.1 million for “light-filled” town centers, $2 million for an additional glass bridge, $700,000 for a new broadcast studio, and $250,000 for a single chandelier. This is perhaps one reason why costs for the headquarters have “risen dramatically” from its original $115 million to $171 million.
The report questions whether these purchases are “appropriate for an entity in conservatorship”, but FHFA Director Mel Watt disagrees, arguing that these upgrades will “benefit taxpayers.” In reality, these upgrades will burden taxpayers. Director Watt saw the potential for taxpayer trouble in the expansion of credit-scoring models; he has also spoken out about the “profit sweeps” that could endanger the safety and soundness of the GSEs. It is important that he recognize a problem here as well.
Precisely because America’s taxpayers never got to vote on whether Fannie Mae fell under federal “conservatorship,” public officials on both ends of Pennsylvania Avenue have a special responsibility to exercise diligent oversight of this entity. Thankfully, next week at a House Financial Services Subcommittee Hearing, lawmakers will have the opportunity to get specific answers from FHFA officials about these purchases and on other questions surrounding Fannie’s and Freddie’s operations. For example, the GSE workforce has grown by nearly one-fourth since conservatorship was imposed, while both Fannie and Freddie’s facility costs have risen by nearly as much.
Furthermore, late last month the FHFA Inspector General noted that despite directives since 2012 to improve transparency in underwriting practices for the GSEs’ $4.6 trillion single-family portfolio, oversight has failed to improve. In its stern opinion, the IG concluded:
Because effective credit risk oversight requires full visibility into the selling policies governing portfolios of this size, FHFA has promulgated standards instructing the Enterprises which selling policies and variances to submit for its review. … In our view, FHFA’s failure to require the Enterprises to comply with its submission standards from February 2013 until the end of 2017, and its continued lack of full visibility into one Enterprise’s single-family underwriting policies, raises serious questions about the effectiveness of FHFA’s oversight of this area and the significant risks associated with it.
Even more broadly, these purchases are further justification to explore the role of government in the housing finance sector. Fannie and Freddie own or guarantee $5 trillion worth of mortgages in the U.S., all explicitly backed by taxpayers. Since conservatorship poses such a great risk, it is important for Congress and the Treasury to develop plans (some of which are already well-formulated) for mitigating those risks. This should include greater reliance on private capital in a secondary mortgage market, which would reduce explicit taxpayer guarantees of first resort. The secondary mortgage market is an integral segment of the U.S. housing system, ensuring liquidity and access to mortgages for qualified homebuyers. But as we have witnessed during the financial crisis, taxpayer backing can create moral hazard and lead to perverse economic outcomes. As these questions are addressed through executive or legislative remedies, the “sweep” which now diverts nearly all GSE profits to the Treasury can end. The profit sweep is a big reason why GSEs have an inadequate amount of capital to cover even small losses, as was the case in Q4 of 2017.
But in the meantime, basic transparency is essential to protect taxpayers from potentially deficient supervision. Reaching the ideal destination on the road to reform requires a clear view of where GSEs are headed and where they’ve been.