Big Banks’ Agenda for Housing Exposed in Today’s New York Times

A front-page tour de force in today’s New York Times confirms our concerns that the nation’s biggest banks are after Fannie and Freddie’s business and that Administration officials have kept the door open to industry leaders who are telling them this would be a great idea –  the impact on consumers notwithstanding.

The story by Gretchen Morgenson details the revolving door between government and private sector interests during the long saga that began when the government sponsored enterprises were put into conservatorship in 2008 and kept in limbo to this day as officials weigh how to replace them with a system that has a bigger role for private sector players.

Considering that the Obama Administration has curtailed lobbyist access to the policymaking process, the overlapping interests and frequency of meetings of industry officials and their former colleagues in government is eye opening.

The story delves into the activities of Michael D. Berman, David H. Stevens and Jim Parrot. After leaving government posts all three continued to work on housing finance, meeting on many occasions with Administration officials. Whether these contacts run afoul of government ethics rules is an important question that should be answered. Nonetheless, a slow and steady handoff of the mortgage finance business to large banks that seems to be underway tracks closely with these communications.

Stevens, a former president of the real estate firm Long and Foster, later served as assistant secretary at the Department of Housing and Urban Development (HUD). Since 2011, he has been CEO of the Mortgage Bankers Association (MBA). Between February 2012 and April 2015, he met 13 times with officials at the White House working on Fannie and Freddie policy, all while serving as the top lobbyist for the mortgage banking industry. On half-a-dozen occasions, he either met with or talked by phone with Ed DeMarco, the former director of the Federal Housing Finance Administration (FHFA), according to documents obtained by the New York Times for the story under the Freedom of Information Act.

Parrott, formerly a counsel to the HUD secretary and a housing advisor at the National Economic Council at the White House, left government service in 2013. Since then, he has worked as a senior fellow at the Urban Institute and as an independent consultant for financial services companies. He has had six meetings with housing officials at the White House.

Finally, Berman, who recruited Stevens to be CEO while serving as MBA Chairman, then himself served as senior advisor at HUD in 2013 before starting his own firm advising real estate lenders in 2014. As a private consultant, he has had two meetings with Administration officials.

Given that all three were closely connected to the Administration’s deliberations about Fannie and Freddie while they were in government, they should have been barred from lobbying government officials on related issues. While it depends on precisely what was said during these communications, Richard W. Painter, a law professor at the University of Minnesota and former chief ethics lawyer at the White House under President George W. Bush, is quoted in the story as saying if the three, “made statements at these meetings that were intended to influence government decisions in these two particular party matters involving Fannie and Freddie, then they violated the statute.”

At the outset of the conservatorship, Berman was tapped to organize a campaign to privatize the nation’s broken home mortgage system on behalf of the MBA. “With the housing market in collapse and Fannie and Freddie weakened and reviled, it was the perfect time to push the mortgage bankers’ plan to take over the companies’ business and divide their prized assets,” the story noted.

The industry-sponsored coalition wanted to create new mortgage guarantors, backed by private capital, to take the place of Fannie and Freddie. A late 2009 report by the Council on Ensuring Mortgage Liquidity proposed that these entities would issue mortgage securities with government guarantees.

Meanwhile, Administration officials, including Stevens, began formulating their own plans for what to do with Fannie and Freddie. Three options were laid out in report to Congress, titled “Reforming America’s Housing Finance Market,” issued jointly by the Treasury and HUD on February 11, 2011. The overarching goal was clear: Reduce the role of Fannie and Freddie in the mortgage market and wind them down – exactly what the Too Big To Fail banks would like.

An internal department memo written on January 4, 2011, to then-Treasury Secretary Tim Geithner even characterized the option of winding down Fannie and Freddie as “a bank-centric model” that “benefits larger institutions” with the capacity to hold mortgages on their books. But that candid summary is was not in the final report, which did, however, acknowledge that “smaller lenders and community banks could have a difficult time competing for business.”

To be sure, when private sector executives have stints in government it will inevitably be in areas in which they have policy expertise and experience. But the Times article underscores a close knit association that has existed for many years as important and often controversial changes in federal housing policy were being developed. As we have highlighted repeatedly, there has been a troubling departure from what the Housing and Economic Recovery Act requires of FHFA as conservator to make Fannie and Freddie sound and solvent, compounded by stonewalling by the government in pending lawsuits emanating from the Third Amendment Sweep (which Morgenson has documented)  and increasing risk for taxpayers by leaving Fannie and Freddie without capital buffers.

In addition we must remember that the GSEs’ role originated during the Great Depression when credit all but disappeared. They have helped create market liquidity and stability and enabled the development of new mortgage finance products that have helped countless Americans achieve homeownership. Even Stevens agrees this is a role than cannot be easily jettisoned.

Today’s story should raise further questions about Senator Bob Corker’s Jumpstart GSE Reform bill championed by Dave Stevens and the big banks in a recent letter to Congress. This is a flawed bill which actively interferes with the statutory duty of the conservator.  Moreover, instead of helping Dave Stevens and his members with their campaign to orchestrate the handoff of Fannie and Freddie’s business to Too-Big-to-Fail banks, Congress should exercise its oversight role and learn more about how Congress’s own policy (HERA) has been subverted by some of the individuals named in today’s article during the last seven years.