Moody’s Zandi Gets it Partly Right
- May 7, 2015
Moody’s Analytics Chief Economist Mark Zandi today added his voice to the chorus of those calling for action around the conservatorship of Fannie and Freddie. .
Zandi makes some good points. His critique of foot-dragging and political paralysis in Congress is appropriate. However, Zandi affirms something we have long held to be true: The Federal Housing Finance Agency, created by the Housing and Economic Recovery Act of 2008, already has the authority under HERA to end its conservatorship of the GSEs.
“Washington gridlock will likely ensure that this won’t happen legislatively. But through resolve and guidance, the Federal Housing Finance Agency could accomplish this,” he writes.
In fact, he notes that Fannie and Freddie have been “increasingly innovative in how and with whom they share risk,” even in the absence of legislation. Of course, we assume neither Zandi nor any other serious observer believes that ad hoc innovations are a substitute for ending the uncertainty caused by the now seven year conservatorship. .
Zandi also affirms our warning that keeping in limbo entities that are “too big to fail” – systemically important financial institutions (SIFIs) by any definition of the word – is not a sustainable policy.
At the same time, we must take issue with some of Zandi’s observations. For example, he asserts, “The problem is that Fannie Mae and Freddie Mac are owned by U.S. taxpayers, who are thus effectively making most of the nation’s mortgage loans. They have been since the government had to take over the two mortgage-finance giants during the 2008 financial collapse.”
In fact, the GSEs are not owned by U.S. taxpayers. Congress made a deliberate decision to place them into conservatorship in HERA. As we have highlighted in an important paper co-authored by two senior officials intimately involved in the drafting of HERA, there was a conscious decision to stop short of a government takeover of the GSE and to reject a receivership. Importantly, the conservatorship was created as an interim measure to return the GSEs to a “sound and solvent” condition so that they could resume their role in providing liquidity and stability to private capital markets.
We also reject Zandi’s premise that investors’ pursuit of their rights under the law is an impediment to the political impasse in Washington. He sums it up this way:
Accomplishing all this is a heavy lift politically. Legislation anytime soon is unlikely. Further complicating matters are various lawsuits by legacy Fannie Mae and Freddie Mac shareholders, who believe the government inappropriately took their property when it took over the institutions. Their arguments seem specious, but until the courts settle the dispute, policymakers feel hamstrung.
There are a host of reasons why Congress and the Administration have not acted on GSE reform; partisanship and intra-party division, the scope and complexity of the undertaking, nervousness about the fallout on financial markets and simply bandwidth. It is also obvious at this point that the Administration is in no rush to cut itself off from the revenue provided by the Treasury’s ongoing Third Amendment Sweep. But pending lawsuits are not impediments to long-term reform.
If anything, the lawsuits brought by groups of investors and the vigilant efforts by Investors Unite are likely keeping pressure on Congress and Administration officials to act in a responsible way. Our actions have brought to light several critical policy matters such as the imperative for the government to honor the rule of law. As we have pointed out, capital follows the rule of law and the government’s clear misinterpretation of HERA has set a dangerous precedent. We have also highlighted that leaving Fannie and Freddie undercapitalized poses a risk to taxpayers.
Finally, in laying out options for reform Zandi cautions, “Changing the system is critical but must be done judiciously. Nothing should disrupt mortgage lending today because the housing recovery is still fragile. Taxpayers should also end up with far less risk and private institutions and investors with far more.”
That is a fair point as well. It is up to Congress and the Administration to find the right public-private balance and allocation of risk. But until there is consensus on a new framework it is anything by “specious” to argue that the Third Amendment sweep is illegal and a contributing factor to uncertainty in the market and inaction by government.