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Let This One be the Last “Unhappy Anniversary”

Fannie Mae and Freddie Mac this week begin their ninth year in captivity. Far from languishing in the government-run conservatorship, the government sponsored enterprises (GSEs) have become model prisoners of sorts. They have shed flab, changed their ways and more than paid back their proverbial debt to society. The Trump Administration has the authority to end the miscarriage of policymaking it inherited from the Obama Administration and should do so without delay.

Today’s Washington Post editorial notes the “unhappy anniversary” of the conservatorship, pointing out GSE reform is the last major piece of “unfinished business” from the 2008 financial crisis. While true, this is a stale fact. “Unfinished business” has been used by the Economist, The Wall Street Journal and many others, including Investors Unite, going back seven years.  Of greater importance is that key lawmakers and their private sector allies seem determined to snatch defeat from the jaws of victory and doom taxpayers to more bailouts and uncertainty.

On this unhappy anniversary consider what has changed for the better since 2009. Thanks to tougher lending practices, banks are no longer giving mortgages away like candy. Fannie and Freddie, never in the dire financial straits feared in 2009, have more than paid back taxpayers for the $187.5 billion in emergency funds – plus another $80 billion. They have been operating quite profitably for five years. In addition, as The Washington Post correctly pointed out, under the supervision of the Federal Housing Finance Agency (FHFA) the companies have shed investment portfolios, moved some risk to the private sector, and made headway in creating what is billed as a more efficient platform for securitizing the mortgages the GSEs purchase. While these steps, known respectively as “risk sharing” and the Common Securitization Platform, have some merit, they were likely conceived as part of a process for replacing rather than reforming Fannie and Freddie. Antipathy for the GSEs and disregard for shareholders has undergirded Administration and Congressional action for years and it shows little sign of abating.

For evidence, look no further than what has changed for the worse over these nine years, specifically the Net Worth Sweep, the decision by Treasury officials in 2012 to divert the GSEs’ revenues to federal coffers. Put aside for now the unconstitutional taking of shareholder property the Sweep represents. On a more practical level, the ongoing raid on the GSEs capital has complicated the business of finishing the unfinished business of GSE reform. Instead of being able to use ample capital reserves as a basis for sustainable long-term policy reforms, officials must grapple with the political and policy disaster of again using taxpayer money to shore up GSEs, possibly next year.  This is a mess of Washington’s own creation and the more lawmakers think they have found a way out, the more obvious it is Congress has neither the ability nor the inclination to do anything other than make matters worse.

Senators Bob Corker, R-TN, Mike Crapo, R-ID, and Mark Warner, D-VA, and other lawmakers appear to be gearing up for new iterations of previous proposals to replace Fannie and Freddie with a private-sector based approach to the secondary mortgage market. The Senate Banking Committee has given the Mortgage Bankers Association a platform to showcase its vision for a world where Fannie and Freddie become two of a small group of “guarantors” that could purchase and securitize mortgages for investors to purchase. The new guarantors would almost certainly be the nation’s biggest banks, such as Wells Fargo. The long reviled implicit government backstop would be replaced with an explicit government guarantee for Mortgage Backed Securities (MBS) the new guarantors would issue. Nothing will make private sector gamblers operate with prudence like the backstop of the full faith and credit of the U.S. government! On top of that, as economist Ike Brannon points out in the Weekly Standard, under international capital rules, government backing would allow the big banks-guarantors to actually hold less capital in reserve against losses. Therefore, the MBA’s plan would introduce the unprecedented step of assuring a taxpayer-funded rescue in an economic crisis, which we know will come. When it does come, and if Congress were to adopt anything like the MBA’s plan, big banks will have been freer to take the kinds of risk that were rampant leading up to the 2008 crisis. This time, at least taxpayers would know in advance they would be on the hook.

If there is some comfort for taxpayers, small and community-based lenders, and would-be homeowners, it is that there is almost no chance Congress has the bandwidth to take up something as complex and politically volatile as revamping federal housing finance policy this fall – or in the foreseeable future. Fortunately, the Administration can act much sooner and it should.

The Obama Administration’s Net Worth Sweep was a misuse of the authority the Housing and Economic Recovery Act provided. The Trump Administration is now erring at the other extreme – underusing its authority to end the conservatorship. The statute mandates the restoration of the GSEs to a “sound and solvent” condition and an exit from the conservatorship. If Fannie and Freddie could start retaining their profits and rebuild adequate reserves, the Trump Administration could lock in reforms already in place and implement others, creating a federal role in housing finance that protects taxpayers. Until then, housing reform will remain unfinished business and the misdeeds of the Obama Administration will become one of the few policies not reversed by President Trump.