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Washington Dithers on GSE Reform as Housing Impedes Economic Growth
Friday, February 23, 2018
The U.S. economy seems to be humming along. While Democrats bristle when President Trump takes credit for this, it is hard to deny that many key indicators look pretty good. But not all do. Housing remains stubbornly soft and Washington’s neglect of Fannie Mae and Freddie Mac helps explain why.
This week the Wall Street Journal noted that sales of previously owned, or existing, homes fell again in January. Sales were 4.8% below their year-earlier level. This was the biggest annual decline since August 2014. Meanwhile, according to the latest data from Freddie Mac, the average rate on a 30-year fixed mortgage is at 4.38%, pointing to a continuing upward trend. The means more working Americans will have a tougher time being able to finance homeownership.
One snapshot of recent data does not provide a complete picture but, nine years into the recovery from the 2008 financial crisis and people are still having trouble financing a home. This is not good for the overall economy.
A significant factor in the ability of people to finance a home is uncertainty about Fannie Mae and Freddie Mac. Their detractors have yet to come up with a way to shut them down without creating new risks for capital markets and taxpayers so the two government-sponsored enterprises remain the pillars of the secondary mortgage market. But Washington is not treating them that way. Instead, they remain in a government-run conservatorship and are routinely stripped of capital. The consequences of this are now evident.
Late last year, the GSEs’ conservator and regulator, the Federal Housing Finance Agency (FHFA), and the U.S. Treasury Department adopted a plan to suspend the GSE’s required quarterly surrender of profits to Treasury. But even with this break from the Net Worth Sweep, the new tax law’s change in the treatment of deferred tax assets created a shortfall large enough to require about $4 billion in public funds or, put more starkly, another taxpayer-funded bailout.
The conservatorship did establish credit lines for the GSEs at Treasury but these were intended for another catastrophe such as that of 2008, not as a first-resort to compensate for draining the GSEs’ capital with no reform plan in place. Since the financial crisis, Too-Big-to-Fail banks have had to operate with tough reserve capital requirements but the GSEs, which back up nearly $5 trillion in home loans, have zero in reserve capital. Rather than protecting taxpayers from GSE losses with buffer capital, policymakers are now unabashedly using taxpayer money as that capital. Few seem to notice or care, at least for now.
Some stakeholders recognize this is untenable. FHFA Director Mel Watt has been calling for Congress to address GSE reform for more than two years, in part because he sees it as “…really irresponsible to try to run any business without some kind of capital cushion.” He has said the lack of buffer capital could, “… stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit for borrowers.”
Just this week, Independent Community Bankers Association President and CEO Camden Fine warned that GSE’s recent need to draw on public funds to cover $6.5 billion in net loss, “… illustrates the need for policymakers to allow a stronger capital buffer at the government-sponsored enterprises to avoid additional taxpayer capital calls and potential harm to the housing-finance system.”
Community banks and other lenders in communities across the country rely on Fannie Mae and Freddie Mac for direct access to the secondary mortgage market. The longer Washington ignores this and delays action on comprehensive, long-term housing finance reform, the more likely it is that housing could be the albatross around the neck of the broader economy.
A year ago, in a prescient analysis, economist Ike Brannon pointed out that Americans spend up to a third of their incomes on housing so what affects this sector affects everything else in the economy. A combination of tight credit, zoning restrictions, and other factors has suppressed new home construction and contributed to a decline in homeownership from 69 percent to 63 percent over the previous ten years. Homeownership among young adults has declined from a peak of nearly 50 percent in 2004 to under 42 percent today.
To get a sense of the implications of this, consider an analysis by Moody’s Analytics that Brannon cited. It suggested home construction boosted the country’s GDP by one percentage point at its peak in the mid-2000s. Then came the housing bubble burst. In 2009-2012, the lack of construction reduced annual economic growth by 1.5 percentage points. Behind the numbers are a lack of jobs, especially jobs traditionally held by male breadwinners in struggling middle-class households.
Brannon pointed out that if new home construction returned to the long-run average of the 1970s and 1980s, there could be another two million homes constructed per year. Not only would this reduce prices and affordability, he estimated it could also add $300-$600 billion to annual GDP. This would put four percent growth – derided as a myth – within reach.
Acknowledging the many factors at play in housing sector activity, Brannon posited the conservatorship and the systematic stripping of Fannie and Freddie’s capital hinders a robust revival in this sector. “Removing Fannie and Freddie from their current limbo and recapitalizing them one way or another could boost financing for housing construction,” he concluded. “This would doubly benefit blue-collar workers, not only creating jobs but also providing more affordable homes as well.”
It is time to stop pretending the demise of Fannie and Freddie is right around the corner. Two of the nation’s largest financial entities remain inadequately capitalized and captive to partisanship. This might account for the persistent sluggishness in home construction and sales and rising interest rates. It might also ensure that sustained economic growth of three percent or more will remain a myth.
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Real Reform for Fannie & Freddie
Current legislation needs to be amended in order for all investors – pensioners, community banks and individuals – to be repaid and create a solid platform for the mortgage market to thrive.
- Repayment of Pensioners, Community Banks and Individuals invested in Fannie and Freddie.
- Stricter lending standards and oversight of Fannie and Freddie.
- Affordable housing goals reinstated and upheld under stricter oversight.
Click here for more information
Investors Unite works to educate Fannie Mae and Freddie Mac shareholders and lawmakers of the importance of reforming the GSEs in a way that will reimburse shareholders what they are contractually and legally owed, but have not been paid.
The United States Congress is considering Government Sponsored Enterprise (GSE) reform that would wipe out Fannie Mae and Freddie Mac shareholders for good. These shareholders include everyday Americans such as public service retirees, teachers, firefighters and police officers. These individuals and pension funds invested in the GSEs before, during, and after the conservatorship and should be made whole under any reform. Taxpayers have been repaid with interest for their 2008 bailout of the GSEs.
Our country’s respect for the rule of law demands that private property rights be protected and Investors Unite gives Fannie Mae and Freddie Mac shareholders a voice in that fight.