Posted by on December 02, 2013
The House is in session Monday through Thursday this week and will consider one Financial Services Committee bill. Be sure to check back here on the Bottom Line Blog -- and sign up for our email updates -- for additional information throughout the week.
Here's whats happening:
On Wednesday at 10 a.m. the Financial Institutions and Consumer Credit Subcommittee will hold a legislative hearing on regulatory relief bills in 2128 Rayburn. And on Wednesday afternoon, the House will consider H.R. 1105, the Small Business Capital Access and Job Preservation Act.
Posted by on November 27, 2013
Chairman Hensarling Op-Ed | November 27, 2013
Persistently weak job growth, higher taxes on families and record-breaking government debt are the hallmarks of the failed economic experiment known as Obamanomics. It is an experiment made up of many policies, but its core revolves around one central belief: A larger, more powerful, more intrusive government can and should fix every problem.
The fact that you can no longer keep your health insurance, even if you like it, is yet more proof that government today has more control over our lives than ever. Perhaps nowhere is the presence of government more intrusive and dominant than in housing.
Government has maintained an oversized role in housing, based largely on the noble — but ultimately unsound — proposition that everyone should be encouraged to own a home. Tragically, a federal government that lives well beyond its means also encourages Americans to do the same.
What has been the effect of government housing policy? A dizzying cycle of booms and busts, first regionally in places such as California, New England and the western "oil patch" states, culminating finally in the massive national housing bubble that gave way to the financial crisis.
That crisis should have shown the wealth-destruction and significant social costs of exaggerated government intervention in housing. Yet instead of pursuing meaningful reforms, President Obama used the crisis to create a virtual government monopoly of the housing finance system.
At the heart of this monopoly are taxpayer-backed entities like Fannie Mae, Freddie Mac and the Federal Housing Administration, which now guarantee nine of every 10 new mortgages. This puts hardworking taxpayers on the hook for more than $6 trillion in mortgage guarantees, more than one-third the size of our entire economy.
The unfortunate irony here is that the very institutions the administration is relying upon to prop up our housing system are themselves already broken, broke and bailed out. Fannie and Freddie infamously received the biggest taxpayer-funded bailout in history: nearly $200 billion. Now there is a crisis at the Federal Housing Administration, which in good times is used to partially finance the operations of the Department of Housing and Urban Development.
A New Deal creation designed to help first-time homebuyers and those with low and moderate incomes to buy homes, the Federal Housing Administration has experienced extreme mission creep since the start of the crisis. It now insures loans on homes valued as high as $729,750 — far beyond the reach of those with truly low or moderate incomes — and controls nearly 60 percent of the mortgage-insurance market, nearly twice its pre-crisis level.
This untenable expansion finally caught up with the Federal Housing Administration in September when it became the latest recipient of a taxpayer bailout. The agency's $1.7 billion bailout — the first in its history — equals roughly 10 percent of its annual receipts.
To make matters even worse, the agency bailout took place without a vote of Congress. The Federal Housing Administration has a permanent and unlimited direct line to the U.S. Treasury, so taxpayers could be writing blank checks for its bailout indefinitely. Every penny gets added on top of our already staggering $17 trillion national debt.
The bailout occurred despite years of assurances from the Obama administration that "all was well" at the agency. Administration officials repeatedly disregarded warning signs of its deteriorating condition, such as last year's actuarial report that revealed the agency's mutual mortgage insurance fund has a negative economic value of $16.3 billion. In fact, every year since 2008, the agency has been in violation of federal law for failing to maintain reserves equal to 2 percent of the current value of its guarantees.
The Federal Housing Administration's financial decline has been hastened by employing many of the castigated practices of subprime lenders such as small down payments, low credit scores and cheap upfront pricing. As a result, families become trapped in homes they ultimately cannot afford to keep. One in eight agency loans ends in default or foreclosure.
The agency has also refused to make full use of the tools it has at its disposal, such as raising premiums to their maximum or increasing minimum down payments. Commissioner Carol Galante testified recently before Congress that such increases would upset the "balance between strengthening the fund [and] making the cost of credit prohibitive for qualified homebuyers."
However, such arguments miss the fundamental point that a bankrupt Federal Housing Administration helps no one.
Clearly, the Obamanomics approach of more government to fix our housing problems is not working, nor is it sustainable.
That's why Republicans on the House Financial Services Committee, of which I am chairman, have offered a new vision for a sustainable housing system for America called the Protecting American Taxpayers and Homeowners Act. The Path Act is designed to reduce the government's domination of housing and right-size the agency's market share.
Specifically, the Path Act reforms the agency by returning its focus to its historic role of helping first-time, and low- and moderate-income homebuyers. It also gives the agency a clear countercyclical role to assist borrowers in times of significant credit contraction.
The Path Act removes the Federal Housing Administration from the Department of Housing and Urban Development, establishing it as a separate, self-sufficient agency. It requires the agency to charge minimum annual premiums, limit taxpayer exposure by properly adjusting the agency's maximum insurable loan limit, and maintain a strict 4 percent minimum capital reserve ratio.
The reforms enacted in the Path Act will create a sustainable housing-finance system and end the ruinous cycle of Washington's failed boom-bust-bailout housing schemes once and for all.
Americans deserve and demand a healthy economy. We cannot borrow, spend or bail out our way to prosperity. President Reagan said, "As government grows, liberty contracts." That applies to our economy as well. If government continues to dominate the housing market, we may never have a truly healthy and sustainable economy.
Posted by on November 24, 2013
Posted by on November 21, 2013
It has been five years since Lehman Brothers collapsed and longer since the US subprime bubble burst. Yet plans to reform Fannie Mae and Freddie Mac – the government-sponsored behemoths that underwrite the US housing market – are little nearer to completion. Both Republicans and the Obama administration agree on the need to wind these entities down. Just not quite yet.
Now a group of activist investors are agitating Washington to privatise their key mortgage insurance functions. Last week they raised their equity stakes in the two enterprises. Their business plans no doubt add up nicely – Fannie and Freddie have returned to solid profitability in the past two years. But a sell-off would make little sense from the taxpayer’s point of view. The US has already privatised too many gains and socialised too many losses. It is past time for Washington to start the liquidation of Fannie and Freddie.
The temptation will clearly be to let things drift on for a while longer. Having pumped $187bn into Fannie and Freddie in 2008, the US government has now been more than repaid in dividends and profits. This year alone, dividends from the two GSEs has reduced the US fiscal deficit by almost $100bn. Fannie and Freddie have also helped to underpin the US housing recovery by underwriting roughly two-thirds of new mortgages. Again, the temptation will be to let the apple cart roll on.
Yet the bigger the US government’s exposure to the housing market the more difficult it will be to wind down Fannie and Freddie. Reforming, rather than abolishing, them would be a mistake. Among the plans in circulation is a bill that would replace the GSEs with a smaller agency that would guarantee mortgage lenders against “catastrophic loss” defined as 10 per cent of principal. The Obama administration also wants to continue with the 30-year mortgage loan – a unique feature of the US housing market. Finally, it wants to maintain support for mortgages to low-income borrowers.
The first two goals are unnecessary and risky. There is no reason the US taxpayer should be on the hook for the next housing bubble. If there is a market for mortgage guarantees, then it will emerge. There is no need for Washington to keep inventing one. The Great Depression conditions that led to the agencies’ creation have lost all relevance. Nor should the US government shield borrowers from the effects of monetary policy. No other country allows borrowers to lock in fixed-rate 30-year mortgages and then to refinance their loans when rates fall. Nor should the US. Instead of insuring against risk, it incentivises risk taking. Again, if a market exists for 30-year fixed paper, let it develop. Washington’s role should be confined to regulation.
There is a stronger case for retaining support for low-income home ownership. But Fannie and Freddie are highly imperfect vessels to deliver it. Low-income support should come by targeted and explicit subsidy rather than an implicitly government-backed market. Fannie and Freddie’s 2008 bankruptcy is sufficient testament to how easily others can game the system. By the time the meltdown hit, the two agencies were backing a majority of subprime mortgages. Never again should the US taxpayer have to step in.
Selling the business off to private investors is the worst option of all. Whatever Washington’s protestations, the market would be likely to treat the agencies as implicitly guaranteed. The original design flaws would persist in a new form. Washington should sell off Fannie and Freddie’s assets to the highest bidders. But the core business should be closed down. To avoid disruptions, the process should be gradual and phased. But that is no excuse for waiting. It is time to bring the curtain down on Fannie and Freddie.
Posted by on November 18, 2013
The House is in session Monday through Thursday this week. Be sure to check back here on the Bottom Line Blog -- and sign up for our email updates -- for committee specific information as the week progresses.
Here's what's happening:
On Tuesday morning at 10 a.m., the Oversight & Investigations Subcommittee undertakes a general overview of disparate impact theory. And in the afternoon, at 1:30 p.m., the Housing & Insurance Subcommittee reviews the implementation of the Biggert-Waters Flood Insurance Act of 2012.
Addressing the lack of oversight and accountability at the Consumer Financial Protection Bureau (CFPB), the full committee will markup the following CFPB reform legislation on Wednesday at 10 a.m:
Finally, on Thursday at 9:30 a.m., the Capital Markets & GSEs Subcommittee will consider a legislative proposal to amend the Securities Investor Protection Act.
Posted by on November 17, 2013
Posted by on November 13, 2013
Matthew Cooper | November 7, 2013
It’s been five years since Fannie Mae and Freddie Mac went under during the financial crisis. Since then, the mortgage giants have been in conservatorship. Congress is still pondering what to do. Everyone’s pretty much agreed that the two should go. (For the record, neither lends money to homeowners directly; they buy mortgages and turn them into financial instruments that can be traded—thus pumping more money into the housing-finance market.) The question is, what should replace Fannie and Freddie? And it’s there that the House conservatives admired by the tea party have offered an intriguing solution, albeit one that’s galvanized many other Republicans and business interests in opposition.
The plan, proposed back in 2011 by Jeb Hensarling, the chairman of the House Financial Services Committee, would abolish Freddie and Fannie; but the big thing his proposal would do is eliminate any guarantee that the government would bail out a new entity. The bill would create a platform for investors to securitize mortgages—kind of like the old Fannie—but there’d be no fallback rescue plan. Hensarling says this would end “the boom, bust, and bailout cycle,” because investors would take fewer chances with their money; that caution would remove the fuel that triggered the flood of housing finance that, in turn, encouraged people to gleefully buy what they couldn’t afford—creating the price bubbles and defaults that led to the financial crisis. What’s more, Hensarling’s plan would rule out a huge price tag like the $180 billion to bail out Freddie and Fannie.
Over in the Senate, Mark Warner and Bob Corker see it differently. The Virginia Democrat and the Tennessee Republican are known for seeking common ground in a divided chamber. Together, they have been working for more than a year on their own plan for abolishing Fannie and Freddie and replacing the two entities with a mortgage market that requires large amounts of private capital to obtain a government guarantee. In other words, the industry would be putting up its own kind of insurance in case things go wrong, akin to the way plain-old banks pony up insurance money to protect customers’ deposits. But if a catastrophic economic event occurs, the government then would provide a guarantee for investors. The president has praised the Corker-Warner approach, and his administration had provided considerable technical assistance. “We’ve been on the phone with them a lot,” Corker says.
Both senators say the guarantee is essential to preserving the 30-year mortgage. Without a government backstop, they argue, investors will not finance a risky endeavor such as the standard mortgage loan—which may appear vanilla to homeowners but to investors represents considerable risk because interest rates fluctuate wildly over the generation-long term of the loan. “If you don’t have this [guarantee],” Warner says, “there would be dramatically higher interest rates, no 30-year mortgage, and you would see a dramatically different housing market.”
The myriad groups involved in housing overwhelmingly back the idea of keeping a guarantee. “We’re actively and aggressively opposing [the House bill],” says Jamie Gregory of the National Association of Realtors. The housing phalanx in Washington is a formidable one, involving lobbies from financial institutions to builders to community activists who want more affordable housing. “Everybody in the industry believes that [Fannie and Freddie] reform needs to take place ... but the complete elimination of the government guarantee is not viable,” says David Stevens, president and CEO of the Mortgage Bankers Association.
While those concerns are legitimate, eliminating the government backstop may be less risky than it seems. Here’s the case for getting rid of the guarantee. The first reason is that it created a moral hazard, encouraging investors in mortgage-backed products to be reckless, because they knew they could be bailed out. That irresponsible spending on the housing side made it ridiculously easy to get a loan, thereby sending demand and prices up, creating the famed bubble. It’s a stretch to say Fannie Mae alone caused the financial crisis; many other actors played a part. But there’s no question that the guarantees are a big problem, and it’s fair to ask if the more sensible guarantees in Corker-Warner would still encourage bubbles.
There’s another reason for getting rid of the guarantee: evidence of enough money floating around the system to keep the 30-year mortgage alive and well, despite the housing lobby’s fears. Look at the market for “jumbo” mortgages, those loans too large to have had a guarantee under Fannie. They have historically done well. Who’s to say funding can’t be found for less valuable 30-year mortgages? “From what I know about capitalism,” Hensarling says, “if somebody demands a product, they’ll get it.” Those in the Housing Industrial Complex want the guarantee, despite its problems in the past, because they fear what would happen to interest rates and availability of capital. Fair enough. If the critics are right and the money does dry up for the housing market, Congress can always turn back to some kind of guarantee. But first, let’s see if the market works.
Warner and Corker would like to get their bill moving to the Senate floor this year. “I am actually optimistic,” Warner says. And, indeed, his bill has bipartisan cosponsors and is likely to become the basis for a Senate Banking Committee bill. For his part, Hensarling will have to sell the idea to a House Republican Conference that will be under pressure to block it unless he backs down on guarantees. That would be an unfortunate retreat. The guarantees didn’t cause the financial crisis, but they made it worse. Industry and the markets cling to them. And that may be exactly the reason to be done with them.
This article appears in the November 9, 2013, edition of National Journal Magazine as After Fannie and Freddie.
Posted by on November 12, 2013
The House is in session Tuesday through Friday this week. Be sure to check back here on the Bottom Line Blog -- and sign up for our email updates -- for committee specific information throughout the week.
Here's what's happening:
On Wednesday the committee will hold our two subcommittee hearings of the week. At 10 a.m. the Housing and Insurance Subcommittee discusses the future of terrorism risk insurance and at 2 p.m. the Monetary Policy and Trade Subcommittee examines international central banking models. Both hearings are in 2128 Rayburn and will be live streamed on our website.
Finally, on Thursday, the committee will meet in open session to mark up the following measures:
The markup will also be held in 2128 and live streamed on our website.
Posted by on November 10, 2013
Wall Street Journal | Affordable Housing Is What You Can Afford
American Action Forum President Douglas Holtz-Eakin on a Senate housing “reform” bill that includes provisions for politically motivated lending.
Baltimore Sun | Consumer protection bureau fails to protect
A report by a Bipartisan Policy Center task force comes after almost a year's worth of in-depth review and analysis and seems to support what critics of the CFPB have been saying all along: This unaccountable bureaucracy harms business and consumers alike.
Heritage Foundation | Fannie and Freddie: What Record of Success?
The notion that the housing finance system in the U.S. worked until banks foreclosed on millions of homes is inaccurate.
Los Angeles Times | Dodd-Frank: Obama's other big bad law
The financial reform measure, like Obamacare, is flawed, with a similar potential to harm ordinary Americans.