Affordable Housing Institute : US

[Continued from yesterday’s GSEs’ fundamental policy value equation.]

 

Yesterday we established the GSEs’ fundamental policy value equation, and gave some exposition as to the factors that comprise each element:

 

 

Okay, says the patient reader, now I understand the algebra, what’s the answer?

 

Please, Obi-wan Kenobi, you’re the only one who can answer the GSEs’ fundamental policy value equation

 

The importance of dynamic testing.  The policy value equation is dynamic — each of its three elements changes over time.  People move; real estate markets move; capital markets move faster.  Markets move fast.  Affordability frontiers shift, as do the political imperatives, and as a consequence, the policy initiatives.  Boundaries shift among Federal, state and local government.  Local needs change.   In short, the world moves fast, and as it does, each of the three variables in the GSEs’ policy value equation is continuously rising or falling.

 

It’s been 35 years since the GSEs were privatized and the current schema put in place, and consider how much is different.

 

In 1970, these were cool

 

1.       In 1970: the US population was 203.3 million, 32% less than today’s 300 million.

2.       The HOME and CDBG programs did not exist.

3.       There was no Community Reinvestment Act (enacted 1977) with real teeth (starting about 1989), so banks were uninterested in affordable housing lending.

4.       Banks had little if any community development commitment, much less robust community development banks.

5.       The non-profit community was thin, and unsophisticated, and poorly capitalized.

6.       The non-profit support community (e.g. LISC, Enterprise, NeighborWorks) did not exist.

7.       There was no Low Income Housing Tax Credit, nor any historic tax credit.

8.       There were essentially no state housing finance agencies.

 

And that was a television

 

Every single one of the foregoing innovations has favorably changed housing affordability in America, making it ever harder for the GSEs to demonstrate the A element — increased affordability.  So the GSEs are in a Red Queen’s Race — just doing more of what the GSEs may have done in the past is not enough.  They have to innovate, and lead.  Pioneering is a continuous process.

 

Meanwhile, as we have seen in the ongoing Fannie Mae scandals (and a few years earlier, similar scandals at Freddie Mac), the systemic risks (the R variable) are very substantial, and hard to control.   

 

Each of the three tests — A, C, and R — requires its own specialized, very smart referee.

 

One worker and two onlookers isn’t enough

 

And the referee must be able to call penalties, and have its rulings respected and enforced.  OFHEO has long argued that lack of enforceability undermines regulatory efforts.

 

Today there is a widespread consensus that, even giving all due credit to OFHEO directors James Lockhart and his bulldog predecessor, Armando Falcon, OFHEO lacks sufficient tools to do the job on its own.  Some of the legislative proposals have in fact proposed splitting the responsibilities, with affordability measured by a beefed-up OFHEO, and safety and soundness (as the R test is commonly called) being handled by Treasury. 

 

The point here is simply that the policy value equation requires ongoing dynamic testing by smart referees.  Nobody today is confident we have sufficiently smart and empowered referees in place.

 

What happens if the GSEs fail the fundamental policy value test?  The Federal charters are not sacrosanct, even though they have no explicit sunset date.  As AEI’s Alex Pollock has commented:

 

Alexander Hamilton’s First Bank of the United States was given a 20-year charter, but this traditional wisdom was forgotten, and Fannie, Freddie and the Federal Home Loan Banks were given perpetual charters. Over the decades, all of them grew and changed beyond recognition. All GSE-like entities, if you do decide to create them, should have a sunset, or a required reauthorization, so they can be reconsidered in the light of experience.

 

In practical terms, Congress could revoke the GSEs’ charter at any time.  Some scholars and advocates, like Tom Stanton and Bert Ely, argue not only that Congress should revoke the charter, but also that it is fairly simple and would have minimal if any adverse consequences.

 

Except to the GSEs

 

However, Congress cannot do anything simply, the OODA loop of the legislative process is far, far slower than the market’s, and what comes out of the government sausage-making factory often differs from what went into it.  Undoing something, even if we conclude it’s worthwhile (and that’s far from proven), is enormously harder than not starting it in the first place.

 

Nevertheless, the question should always be asked.  The GSE fundamental policy value equation should be continuously tested, every year.

 

What do you think about the GSEs, Bob?

 

Conclusion.  If, as Baudelaire and Keyser Soze observed, the greatest trick the devil ever pulled was convincing people he did not exist, then in some sense the greatest policy success the GSEs have had up to now has been to prevent the fundamental GSE question from even being asked, let alone debated.

 

As the new 110th Congress moves forward with its GSE regulatory reform package, those reforms should be seen — and evaluated — not in isolation but contextually, weighed in the balance as one of the three elements in the fundamental policy value equation.

 

Are they worthy of admission to heaven?

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