John Carney’s Plan to Put Banks in Charge of the Mortgage Market…Because Nothing Will Go Wrong With That Idea

In his piece in yesterday’s Wall Street Journal headlined “Banks Rediscover Their Homing Instinct,” John Carney is making the case for getting rid of Fannie Mae and Freddie Mac as guarantors of mortgages, reasoning that the big banks will step in to fill the gap. You know, those same banks that are being fined hundreds of millions of dollars for mortgage fraud.  Not surprisingly, Carney leaves this part out of his analysis. 

Carney’s analysis of the share of U.S. mortgages held by the banks notes that the “long-term trend of banks unloading mortgages has reversed,” which will help banks and hurt the GSEs. He calls this “boring banking.” We call it putting the dream of home ownership into the hands of a privileged few who can meet the banks’ standards.   

Here’s a bit of Carney’s reasoning:

“Notably, banks began adding mortgages to their balance sheets at an even faster pace than the mortgage market has grown. In 2014, the share of mortgage debt held by banks rose above 31% for the first time since 2009, according to Fed data. Larger regional and national banks are not only holding a bigger share of the mortgages they originate—they are buying up mortgages from smaller lenders.”

Carney must not read his own newspaper because there was an article just the other day about how “risky borrowers” are still having trouble securing mortgages. From the article:

“The percentage of mortgage borrowers backed by Fannie and Freddie with low credit scores or a low down payment has also risen since mid-2013, even though it has dropped recently with a change in the companies’ business mix.”

The thing is, banks have a terrible track record of lending to underserved communities where otherwise qualified potential homeowners struggle to establish credit under rigid guidelines or just don’t have the means to pull together a down payment large enough for the typical mortgage. In addition, the GSEs have played an important role in creating the 30-year mortgage. Their role is not to make risky or fraudulent loans but to provide financing options to make homeownership attainable for working Americans.

The GSEs are critical to expanding access to affordable home mortgages. That is a fact. So while Carney refers to banks holding onto mortgages as “trendy new boringness,” we see his prescription creating new obstacles to homeownership for too many, and homeownership is the fastest and most reliable way to build wealth in this country. It’s that kind of flawed analysis that led activist investor Bill Ackman, the CEO of the $18 billion hedge fund Pershing Square Capital Management to refer to some recent works from Carney as “the ’most factually inaccurate’ and ‘frankly embarrassing’ articles about Fannie Mae and Freddie Mac.”