Administration Can Act and Should on GSE Reform
- May 18, 2017
Treasury Secretary Steven Mnuchin today reiterated to Senate Banking Committee members that GSE reform was a priority, revealing little about his strategy, and stopping well short of telling Senators he needs them to get this done. Instead, he simply welcomed the continued partnership.
“We will ensure that there is both ample credit for housing and that we do not put taxpayers at risk. This Committee has done extensive work on this along with your work on community financial institution regulatory relief,” Mnuchin said in his prepared remarks. “My hope is that we can partner on both of these issues. I look forward to working with the Congress to develop a solution.”
In an exchange with Sen. Jon Tester, D-MT, Mnuchin showed no interest in putting the 30-year-fixed-rate mortgage at risk, given that it has been part of the home loan landscape for as long as most Americans can remember. Fannie and Freddie, of course, are widely credited for allowing this product to flourish since they have ensured a steady stream of capital into the home lending marketplace.
More broadly on reform ideas, Mnuchin acknowledged that if it is necessary to have an explicit guarantee behind loans then it would have to be “paid for” and there would have to be ample funds to ensure we would “never hit it” – much like the FDIC for banks.
That seems rather non-controversial. If there is a government backstop, there should be enough capital behind it. Otherwise, taxpayers would have to make up for shortfalls. A repeat of 2008 would be politically disastrous. This was perhaps the most glaring lesson that should have been learned from the 2008 financial crisis. And yet, Congress has not taken any steps to make sure the GSEs are capitalized. Instead, many Members of Congress want to go in the opposite direction: Let the GSEs drift into shortfalls so taxpayers again have to shore them up. As if this would hasten the creation of a carefully-designed, long-term strategy for housing finance policy.
Meanwhile, Federal Housing Finance Agency Director Mel Watt continues to tout the many steps his agency, acting as conservator, has taken to reform Fannie Mae and Freddie Mac. So why turn over to Congress the task of finishing the job at this time?
In remarks today before the American Mortgage Conference in North Carolina, Watt said FHFA has made great strides to shift credit risk from Fannie and Freddie to private sector entities and ensure the GSEs would not again get overloaded with bad loans. And yet, undercapitalization – a chief culprit in having to put the GSEs in government control in the first place – is arguably worse than ever. Congress, however, has shown zero willingness to grapple with this.
Watt has repeatedly warned that the GSEs’ capital buffers are almost gone. In the face of imminent danger to taxpayers for another draw on public funds to address possible losses, top lawmakers seem to prefer to exacerbate the problem. Last week, when Watt appeared before the Senate Banking Committee, the panel’s chairman, Sen. Mike Crapo, R-ID, fretted that Watt would actually use his statutory authority and suspend the transfer of GSE revenues to Treasury, which has been occurring regularly for five years with the implementation of the Net Worth Sweep. Crapo said keeping reserve capital in place would lessen the sense of urgency Congress has in addressing GSE reform. As we noted last week, this was an ironic observation given Congress’s utter failure to come up with a GSE reform approach that would protect taxpayers from future bailouts. Sen. Bob Corker, R-TN, went so far as to dare Watt to seek a draw on taxpayer funds right away, assuming no one would care.
Watt today again assured, “…Fannie Mae and Freddie Mac have significantly improved their risk management and operations. We’ve aligned certain business practices, such as loss mitigation standards and counterparty requirements.” He added that credit risk transfer strategies are working well so, “…the cost of these transactions should not exceed their CRT benefits.”
Somehow though, protecting the taxpayer with adequate capital continues to be beyond policymakers’ reach now.