Former Government Officials Upbeat about Eventually Killing Fannie and Freddie
- March 17, 2016
Liberated from having to parse words in government-speak, former senior housing officials this week acknowledged that the transfusion of the life blood from Fannie Mae and Freddie Mac to large banks has taken more time than they expected but they’re ready to draft the obituary for the GSEs, nevertheless.
The names Ed DeMarco and Jim Parrot are familiar to anyone following the conservatorship. They were deposed in the process of trying to get to the truth about the illegal Net Worth Sweep and securing justice for shareholders. Speaking at a housing finance conference Tuesday sponsored by Goldman Sachs, they spoke with revealing candor about their optimism that the mortgage finance model that has worked well for decades is still on track to be carved up and allotted to the nation’s largest banks.
DeMarco is now a senior fellow at the Milken Institute’s Center for Financial Markets. He served as acting director of the Federal Housing Finance Agency and the conservator for Fannie Mae and Freddie Mac from 2009 to 2014. If Fannie and Freddie were patients, and DeMarco was the attending physician, he and his team would be sued for malpractice. Of course, investors have sued.
During this time, Fannie and Freddie were sprinted into the emergency room. Misdiagnosed as gravely ill, they were put on a regimen of harmful addictive drugs in the form of government capital on predatory terms. The dosage was increased twice. As we noted recently, the result is that Fannie and Freddie are now on the hook to pay back loans they did not need and on terms designed to be impossible. When the patients showed remarkable stamina, the Net Worth Sweep was imposed in 2012, thereby ensuring their unnecessary and unethical confinement.
Although Fannie and Freddie are no longer in his care, DeMarco seems pleased that both Fannie and Freddie’s prognoses grow bleaker and the big banks become proportionately more hale and hearty every day. In his remarks, he stated his aims in the conservatorship were to “wind down Fannie Mae and Freddie Mac,” “build a common securitization infrastructure” and “shift mortgage credit risk from taxpayers back to market participants.”
“Even without legislation, such a platform is becoming close to a reality today,” DeMarco boasted. “We are two years away from having a modern securitization infrastructure that ultimately can replace Fannie and Freddie’s outdated and proprietary infrastructures.”
Indeed, the mistreatment is going according to plan. The common security platform is getting built, thanks to the restraints on the capital of Fannie and Freddie. The Too-Big-To-Fail Banks need only be patient and persistent in getting Congress to formally adopt the mechanics of the capital transfer. Legislation to “separate” the common security structure from Fannie and Freddie would create a structure operating as “a pure market utility capable of serving other issuers,” in DeMarco’s view.
Unclear in this experiment is who would own this utility and who would be served by it. It is reasonable to guess the answer is the big banks and not the average American looking to secure home financing on reasonable terms.
Parrot figures it will take three years for the “reform” plan to take shape. Parrott was a top housing official in the Administration who, since 2013, has worked as a senior fellow at the Urban Institute as well as an independent consultant for financial services companies. Questions about a revolving door relationship with him and other former government officials have been raised in investigative reporting by the New York Times.
When an enterprise is placed into conservatorship, just as when a patient is admitted to a hospital, the expectation is treatment and release. More than an expectation, it is the law with regard to the conservatorship of Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act stipulated the conservator was to restore the GSEs to a “sound and solvent” condition.
Instead, under DeMarco’s watch, FHFA and Treasury teamed up to try to drain the patient of life. DeMarco now readily admits this. He is now explicit in his call for completing the process of creating a new housing finance system from Fannie and Freddie’s pieces through unconstitutional takings of assets that don’t belong to the government but to shareholders. Of course, as investors continue to press their case, there is a lot that can happen before the Frankenstein the big banks want to create is set loose on the public.