Stupendously short-sighted

January 5, 2012 | Fannie Mae, Freddie Mac, GSEs, Legislation and policy, Lending, Regulation, Subprime, Taxation, Theory, US News

By:David A. Smith


‘Stupendously short-sighted’ is the closest I can come to headlining the most recent nonsense to come out of Washington where, for the sake of short-term political cover and to score cheap political points against one another, Congress and the Administration have connived to take a step that at best is a gratuitous tax on home financing, and at worst a further drag on an economy that already has plenty of them and a violation of basic principle. 


Did they get more than I got for having no principles?


As reported on December 29 in Bloomberg News:


Washington lawmakers, who began 2011 with sweeping plans to shrink the U.S. government’s role in mortgage finance, are heading into 2012 after enacting policies that expand it. [Not so much expand as perpetuate – Ed.]


An eleventh-hour payroll tax cut extension signed into law last week will for the first time divert funds directly from Fannie Mae (FNMA) and Freddie Mac, the two mortgage-finance companies under U.S. conservatorship, to pay for general government expenses.


Dipping into the GSE revenue streams is being done not for any policy-based reason, not for anything to do with housing, not out of any need to protect or recapitalize the GSEs, not because their management requested it, and not to boost the economy or help home pieces – in fact, it will hurt both – but simply because it was cheap defenseless scoring dollars.


Didn’t see it coming, did you?


Are the GSEs entities, with a business purpose and a mandate and their own independence, or are they just a piggy bank to be raised whenever the impoverished government feels the urge?


Spend it now, sire, don’t worry about later


The latter, Congress and the Administration have decided.


Advocates of private mortgage finance say they are concerned that using fees from Fannie Mae and Freddie Mac is setting a precedent that will keep the government in the mortgage business for a decade or more.


It is.  Worse, how about setting a precedent that any government enterprise is just a plaything for profligate legislators who cannot discipline themselves to cut costs elsewhere?


Fannie Mae and Freddie Mac have cost taxpayers about $153 billion since 2008 because of defaults on loans they guaranteed.


Yes, it was a catastrophic failure, as I and many others predicted and have documented.  But that was then, and we can’t afford to be short-sighted with the GSEs’ future.


“The goal was, at the beginning of the year, how do we wind these down?” said Edward Pinto, a resident fellow at the American Enterprise Institute, a Washington-based research organization that favors limited government. “And at the end of the year we have further entrenched them and made it more difficult to wind them down, which is classic Washington.”


Unsafe at any size, says Pinto


While I lack the horror that Mr. Pinto feels about the prospect of the GSEs’ further existence, I wholly agree with him that a decision about their future is so momentous it needs to be thought about, not made slightly more inevitable because of a thoughtless money grab.


The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac (FMCC), today directed the companies to increase fees on new mortgages by an average of 10 basis points, or 0.1 percentage point, effective April 1, to comply with the law.


“The average guarantee fees charged in 2012 need to be at least 10 basis points greater than the average guarantee fees charged in 2011,” with the additional revenue remitted to the U.S. Treasury Department, FHFA Acting Director Edward J. DeMarco said in a written statement.


Mr. DeMarco said nothing further, because he had no choice but to comply, and anything he might say would be unprintable.


“You might think this was stupendously short-sighted and unprincipled; I could not possibly comment.”


Fannie Mae, Freddie Mac and the FHA currently back more than 90% of loan originations, about double what they did during the subprime lending boom, according to Inside Mortgage Finance, a trade publication.


Basically, we need the three amigos to keep lending, and I believe there is a logical and important role for a well-constrained Fannie/ Freddie to operate.  As Woody Allen said, we need the eggs.


“We need the eggs”


Earlier in the year, the Obama administration and members of Congress outlined plans to reverse that trend.


Actually, no – the officials offered possible recapitalization strategies for the GSEs that would restrain the moral hazard and systemic risk; they neither said nor implied anything in particular regarding


In February, Treasury Secretary Timothy F. Geithner released three options for reducing government’s role in housing finance.


Which boiled down to, Left, Right, or Straight Ahead – in other words, options without analysis. 


You pays your billions and you takes your choice


Shortly afterward, Republicans introduced bills to wind down Fannie Mae and Freddie Mac. The legislation never advanced because there was no agreement even within the Republican caucus on the best way to proceed.


Wisely – open-heart surgery is tricky stuff, even harder in an out-of-control train.


“We need to reform the GSEs.”

“Not now, Indy!”


In December, in a search to find about $36 billion to finance a two-month payroll tax cut, Congress ordered a decade-long increase in the premiums that Fannie Mae and Freddie Mac charge lenders to guarantee principal and interest on home loans.


This just makes me even madder. 


I’m with him


To deal with this political charade for a measly two months – a charade that is going to collapse shortly, because we cannot sustain these astronomical deficits very long – the Congress and Administration connived to impose ten years of surcharge on homeowners nationwide.


Something like this


Enjoy your payroll tax cut, America – you’ll be paying for it sixty times as long now.


Lenders typically pass on the cost of the premiums, known as guarantee fees or G fees, to borrowers as higher interest rates.


The move is drawing criticism: It relies on long-term revenues from entities that Democrats and Republicans want to shrink, and the money won’t be spent to offset the risk of loan defaults.


Absolutely.  The move is horrible, irresponsible, and so cynical as to make a madam blush.


“In effect, this is a tax on Fannie and Freddie mortgages,” said Bert Ely, a banking consultant in Alexandria, Virginia. “When you go to privatize or take any action to wind them down, you have a budget effect that you didn’t have before.”


True enough, although the budget implications are minor in the greater scheme of things (I’m sure we could find savings by eliminating the entities’ presumed risk).


“It seems to be an inherent contradiction counting on revenue from a 10-year increase in guarantee fees from agencies that might not be around in 10 years,” said Joe Pigg, vice president of mortgage finance at the American Bankers Association, an industry trade group in Washington.


Evidently integrity is out the window.


There goes the last of our so-called principles


Housing analysts say they are concerned that lawmakers will now start looking to the government-sponsored enterprises as sources of funds for purposes unrelated to housing.


“Using the G fees as a funding source for general revenues sets a bad precedent for how you’re going to raise revenues,” said Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, which advocates for government policies that support affordable housing.


From Recap to testimony: Ethan Handelman


My former long-time colleague Ethan’s right, and much more measured than I would be – but then, he represents a big-tent organization, and I represent only my sharp-tongued self.


Fannie Mae and Freddie Mac are also implementing plans of their own to raise guarantee fees even higher. DeMarco said the companies would gradually increase their rates as a way to reduce losses at the companies and limit their cost to taxpayers.


At least there is a logical principle here: charge what it costs, put the GSEs on a sound ongoing footing.


Those fee increases, which have already begun, are intended to better reflect the degree of risk that the GSEs are assuming when they guarantee mortgages, DeMarco said.


The controversy over G fees comes on top of other policy changes that housing analysts say could keep the government entrenched in the mortgage market.


In November, House and Senate lawmakers increased the maximum size of FHA-insured loans to $729,750 from $625,500, a move opposed by Republican leaders including Representative Jeb Hensarling of Texas.


A fiscal conservative through and through: Hensarling


Although Mr. Hensarling opposed it, raising FHA loan limits isn’t particularly controversial – the loan limits should be raised periodically to reflect inflation, although at some point the prices are ‘high enough’ that the federal government need not be involved.


Congress’s rush to solve fiscal problems at the end of the year allows decisions to be made without going through the normal deliberative channels that might have produced outcomes more in line with the goal of reducing the government footprint in housing, Pinto said.


He is perfectly correct – Congress acts in haste, we collectively repent at leisure, or in this case, over the next decade.


“You have these policies being made that aren’t really going through the regular order, and they’re not being discussed and hearings held and testimony taken,” he said. “They’re just being done as an expedient.”


Expediency, thy name is politics.


Though it usually does