A ‘Disastrous’ Republican Proposal to Redo Fannie and Freddie

By
Tuesday, May 11, 2010 at 6:00 am

Sens. Mitch McConnell (R-Ky.), Richard Shelby (R-Ala.) and Judd Gregg (R-N.H.) (EPA/ZUMApress.com)

For the past year, Republicans have insisted that Congress take up legislation to stop the losses at Fannie Mae and Freddie Mac — the government-sponsored enterprises that buy up and repackage mortgages, keeping loan prices stable. Fannie and Freddie have incurred more than $150 billion in losses since the burst of the housing bubble. “In my view, it’s simply not acceptable for some on the other side to suggest that we have to rush this [Wall Street] bill through Congress, but that it’s okay to wait another year to address the GSEs, which we all know played a central role in the financial crisis,” Sen. Mitch McConnell (R-Ky.), the minority leader, argued earlier this month, a contention often repeated.

[Economy1]But the Republicans never said how they thought the GSEs should be reformed — until now. Last Wednesday, Sen. John McCain (R-Ariz), Sen. Judd Gregg (R-N.H.) and Sen. Richard Shelby (R-Ala.) proposed an amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill, the GSE (Government Sponsored Enterprise) Bailout Elimination and Taxpayer Protection Amendment.

Releasing the proposal — with numbers, dates and directives aplenty — Gregg commented, “Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail.’ The time has come to end Fannie Mae and Freddie Mac’s taxpayer-backed slush fund and require them to operate on a level playing field.”

But housing market experts describe the Republicans’ proposal as disastrous. Analysts from both sides of the aisle contend that the proposal would unwind Fannie and Freddie so quickly and precipitously that it would destabilize the entire housing market: pushing mortgage prices up, pulling support from low and middle-income Americans and ending the nascent — if at all extant — housing recovery.

The GSE amendment would effectively shutter the mortgage giants, which together backstopped 97 out of 100 new mortgages in the first three months of the year, according to Inside Mortgage Finance. It would keep keep the current government conservatorship in place for 24 months (or 30 months, if the Federal Housing Finance Agency determines that market conditions are “adverse”). Then, it would begin begin the process of dissolution.

Were Fannie and Freddie to prove “viable” as private institutions (a term left ambiguous) after 24 or 30 months, they would become highly regulated institutions for three years, before the expiry of their charters. They would have no affordable housing goals, would have to reduce their mortgage assets yearly, could not purchase mortgages exceeding median-home values and could only buy mortgages with certain minimum down payments — among other provisions. Additionally, they would have to pay taxes. Were Fannie and Freddie not “viable” in two years — likely, given that Fannie reported yesterday that it does not see itself reporting a profit for the “indefinite future” — the amendment puts them into receivership.

Housing experts say that the bill would impact every participant in the housing economy, including builders, buyers, developers, lenders and banks. It would make vanilla mortgages — such as 30-year, fixed-rate mortgages — much more scarce, and would make all mortgages more expensive. It would remove a major source of liquidity in the mortgage market, causing credit problems at mortgage-reliant banks. It would also rapidly reduce the number of homebuyers.

Experts describe the McCain-Gregg-Shelby amendment’s transition as too much, too soon and too blunt. Kenneth Posner, who analyzed Fannie and Freddie for Morgan Stanley and is the author of Stalking the Black Swan, describes the plan as going “cold turkey” when it might be better to “use methadone.”

“The issue is that what Fannie and Freddie issue is considered close to government debt, and there is no limit on their ability to grow. That was fine a long time ago when they were small. But now, they’re big — we’re creating trillions of dollars of Treasury-like debt,” he explains. “We’re also dealing with the reality that too much stimulus for the housing market is a bad thing. That’s what the Republican [proposal] is getting at. But it does not answer the question of the transition [away from that support].”

Barry Zigas, the director of housing policy for the Consumer Federation of America, is blunter. He says that the Republican approach takes a “meat-axe” to an extremely fragile market. “It takes a very prescriptive and dangerous approach to a problem that at this point does not require it,” he says, noting that the Senate has not even held hearings on how to deal with Fannie and Freddie yet.

“It puts any housing recovery in jeopardy — the amendment is a huge gamble that forces the government to quickly and radically restructure these two companies without providing a clear path to a stable mortgage market in the future,” he says. “For one, it would raise down-payment requirements precipitously, which would be injurious to low-income communities and communities of color.

“This is a very heavy-handed and ultimately very unhelpful approach to a complex problem.”

“Some of it is serious. Some is trying to stir up trouble,” says Dean Baker, the co-director of the Center for Economic and Policy Research. “It doesn’t make sense to talk about dismantling Fannie and Freddie yet — and we’d really have to think this through more thoroughly. It does not, for instance, explain how it would sell off Fannie and Freddie’s assets, or in what form. Who would back them? What is the benefit to rushing this?” Baker says. “The risk is so obvious that the proposal seems strange.”

And with such obvious risks and despite Republican pressure, Democrats have punted on the question of how to reform Fannie and Freddie. This spring, the Treasury Department released a set of seven questions it said it was attempting to answer — stating that it was working on reform but needed more time. And yesterday, Sen. Mark Warner said the administration plans to release its Fannie and Freddie proposal next year.

“I think it’s a fair claim to make to say we haven’t done enough to address Fannie and Freddie,” Warner said. “It is the big elephant in the room that hasn’t been addressed.” But, “We’ll come back next year and take on Fannie and Freddie in a more thoughtful way.”

Follow Annie Lowrey on Twitter


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44 Comments

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redhawk1
Comment posted May 11, 2010 @ 3:14 pm

May be the Senate, Reid sense of urgency for another Disaster notwithstanding, they need to :
a) Investigate all the ” bought” Senators by Freddie and Fannie including Obama and recluse them from ANY financial reform Plan… They are all “Tainted”
b) Wait for the report from the Financial Crisis Inquiry Commission , force the Senators to READ IT from cover to cover and then Start from Scratch and do an actual Intelligent Reformm plan that MUST include Freddie and Fannie with CAPS ( not like the Geithner Christmas eve Disaster) in order to STOP the Wasting of Tax payers money into the F&F abyss… ENOUGH IDIOCY BY DODD and CO already!!

Lastly Every Member of Congress and the WH MUST BE MADE to read this, memeoroze it anf Follow it”
1. You cannot legislate the poor into prosperity, by legislating the wealth out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3, The government cannot give to anybody anything that the government does not first take from somebody else.

4. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work, because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation.

5. You cannot multiply wealth by dividing it.

=


redhawk1
Comment posted May 11, 2010 @ 3:20 pm

1. You cannot legislate the poor into prosperity, by legislating the wealth out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3, The government cannot give to anybody anything that the government does not first take from somebody else.

4. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work, because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation.

5. You cannot multiply wealth by dividing it.

=
IF only Every member of Congress could take the TIME to Just Read this we just might have these Inepts come up with good Legislation … Wall Street must be Reigned in but above that Freddie and Fannie must be Thoroughtly CUT back from wasting more tax payers dollers via additional bail outs. On this Dodd , Frank Obama and anyone else Must REcluse themselves since they ewere
bought” by F&F….in Addition since thetre is an ongoing Financial Crisis Inquiry Commission Investigating who, How and Why we got into this mess, why not wait for the results, reccommendations and then work on a true solution??? Is another rush ti Disaster like the HC bill what Wesael Reid wants to accomplish???


marya
Comment posted May 11, 2010 @ 3:23 pm

Republicans are relentless, ruthless and focused. Democrats could use a little of that. But, that being said, Republicans should accept for now that they are the minority. (of course, they will never do that. That's part of the relentless thing). When they hold the majority then they can run around re-writing Fannie Mae and Freddy Mac. They want to avoid financial accountability at all costs because it will make their rich buds unhappy and when they are unhappy the money dries up.
I do believe we are living in one of the most politically fascinating political eras in our history. I am 80 and thought I had seen it all, but I haven't. On some semi-self-destructve level l I would almost like to see the Tea Party hold the power for a while, let the good people of America see why the Constitution does really mean everything and really must be guarded from any who would dismiss it at their whim. We do live in interesting times.


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Swami_Binkinanda
Comment posted May 11, 2010 @ 9:12 pm

1. You cannot legislate the poor into prosperity, by legislating the wealth out of prosperity.

But you can raise the floor without lowering the ceiling. Poor can mean naked people with swollen bellies on the streets with flies in their eyes, or it can mean people with the least amount of money but surviving with the hope that through hard work and education they can improve their lot over time. Which are you proposing: a lifetime underclass of nutritionally deprived starving bandits or people who are only suffering a lot?

2. What one person receives without working for, another person must work for without receiving.

No man makes a fish, but you can waste days fishing and eat every day while never doing a lick of work. If I don't fish are you stealing from me?

3, The government cannot give to anybody anything that the government does not first take from somebody else.

Governments give licenses. If I get an oil drilling permit offshore and pump out billions of oil to sell, did the government rob the fisherman? Or the fish? If I stake a mining claim and someone tries to jump it, but I win my case in a government court (stolen from some private court no doubt) is the government still the ultimate thief, or the claim jumper?

4. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work, because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation.

Work brings freedom! When five percent of a nation owns 95 percent of its assets, is there a nation? Or an estate? When 20 percent of the people want to work but their jobs have been sent to communist slave countries by the five percent that own everything, are the 20 percent bums and useless eaters? Should they ask, am I my brother's keeper?
Why aren't more smug conservatives out their living it up on welfare if it is so damn good? Because they are full of it is why.

5. You cannot multiply wealth by dividing it.

Unless you are sharing seeds. Sorry Monsanto, you don't own everything yet.

Conservative people and their oversimplification can be charming but in every case dash themselves to bits against the brick wall of reality. These aphoristic pronouncements have a very Germanic tone to them. The reason conservatives are so unhappy these days is because these aphorisms are not true and they cannot figure out why this is so. Like sci fi robots of the 60s they are teabagging each other screaming “does not compute!”


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staticvars
Comment posted May 12, 2010 @ 5:19 pm

“It would also rapidly reduce the number of homebuyers.”
What do you mean by this? It may cause a change in the rent-buy decision graph, where it becomes economically better to rent than buy. However, it could cause prices to fall as well.

These idiots at the GSEs are continuing to buy housing debt with 3.5% down payments! Backed by current and future taxpayers. Do we really housing price volatility has reduced to the point where a 3.5% down payment is sensible?

We don't want a “housing recovery” if that entails prices rising again- where a median house costs 5x the median income. Well meaning, but misguided, people like this author want the housing bubble to return, funded by our loose credit standards and letting people bet in the housing casino on a taxpayer funded margin.

No way. Let's see what houses are really worth. Sure, we might need more than 3 years to unwind Fannie, Freddie, and Ginnie: make it 5 years, make it 7 years, just make it happen!


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TopAssistant
Comment posted May 16, 2010 @ 6:02 pm

Now just where in the Constitution does it give our government the authority to be involved in funding home loans for anyone, especially someone who cannot pay the loan? The Constitution limits government involvement. Here are the things the government can be involved.

Constitution Article 1 Section 8
Here is the LIMITED power given to Congress by the Constitution: Article I Section 8.
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;
To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;
To provide for the punishment of counterfeiting the securities and current coin of the United States;

To establish post offices and post roads;
To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;
To constitute tribunals inferior to the Supreme Court;
To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations;
To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;
To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years;

To provide and maintain a navy;
To make rules for the government and regulation of the land and naval forces;
To provide for calling forth the militia to execute the laws of the union, suppress insurrections and repel invasions;
To provide for organizing, arming, and disciplining, the militia, and for governing such part of them as may be employed in the service of the United States, reserving to the states respectively, the appointment of the officers, and the authority of training the militia according to the discipline prescribed by Congress;

To exercise exclusive legislation in all cases whatsoever, over such District (not exceeding ten miles square) as may, by cession of particular states, and the acceptance of Congress, become the seat of the government of the United States, and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the building of forts, magazines, arsenals, dockyards, and other needful buildings;–And
To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.


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To Top Assistant
Comment posted May 18, 2010 @ 6:05 pm

“To regulate commerce with foreign nations, and among the several states.”

If you have followed constitutional law at all over the last century, you know that Supreme Court has repeatedly construed the commerce clause as allowing for the regulation of business activities that “substantially affect interstate commerce.” Over the years, this has covered everything from setting controls on grain production for the purpose of subsidies to the regulation of meat packing safety.

The only recent landmark Supreme Court case that did not allow federal regulations on commerce clause grounds was United States v. Lopez, where school gun laws were held as not being significantly related to interstate commerce. Here, I think it would seem clear that legislation designed to provide an institutional backing for home loans to low to moderate income homebuyers would have a very significant affect on interstate commerce (as for the housing market has been the driver for the economy and commerce as a whole).

I think it's commendable that people look to the constitution and feel the civic duty to speak out and protect it, maybe next time it wouldn't hurt to do a little research. And while Fannie and Freddie were certainly part of the subprime problem, lets be careful before throwing around accusations about the lack of consitutionality of the two institutions as a whole.


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louis vuitton
Comment posted July 29, 2010 @ 2:21 pm

These idiots at the GSEs are continuing to buy housing debt with 3.5% down payments! Backed by current and future taxpayers. Do we really housing price volatility has reduced to the point where a 3.5% down payment is sensible?


louis vuitton
Comment posted August 8, 2010 @ 3:52 pm

Now just where in the Constitution does it give our government the authority to be involved in funding home loans for anyone, especially someone who cannot pay the loan? The Constitution limits government involvement. Here are the things the government can be involved.


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