Congressional Democrats are reeling from Obamacare, Republicans are caving-in to President Obama’s budgetary demands, and the First Lady is emotionally wounded because of her husband’s flirtatious behavior in South Africa. That’s the sum total of activity in Washington, DC here at year’s end – right?
Not
quite. Lurking quietly in the halls of
the U.S. Senate is, apparently, growing bi-partisan support for legislation
that is supposed to “reform” Fannie Mae and Freddie Mac. Yet some fear that the
“Corker-Warner bill” – named for Senator John Corker (R-TN) and Senator Mark
Warner (R-VA) could threaten the very
existence of the 30-year mortgage and put American taxpayers on the hook with
even more debt.
First some facts about “Fannie and Freddie.” Officially known as the
Federal Home Loan Mortgage Corporation) “Freddie” by definition a government sponsored
enterprise (GSE). Freddie and its counterpart Fannie Mae (the Federal National Mortgage
Association) compromise the nation’s two largest mortgage finance lenders, and
as GSE, they both operate
under some unique conditions.
Both companies are
owned and operated by private shareholders, yet they are also exempt from state
and local income taxes and are exempt from oversight by the U.S. Securities And
Exchange Commission, even as they both have
access to credit directly from the U.S. Treasury. The purpose of these two
quasi-governmental entities is to expand the secondary mortgage market (that
is, the market for securities and bonds that are financially “backed” by
mortgages) in the United States. As such, they buy individual mortgages, “pool”
them together, and sell them to investors as “mortgage backed securities.”
Mortgage-backed
securities are themselves very complex financial instruments, wherein the risk
of borrowers defaulting on their loans is spread out so as to minimize the pain
should defaults happen. When investors buy a mortgage-backed security (MBS),
they are essentially backing somebody’s mortgage loan, or in other words, the
buyers of the MBS become the mortgage lenders (buyers also collect the interest
on the loan, as well). This is because an MBS essentially allows a smaller bank
to extend a mortgage loan without significant concern as to the borrower’s
ability to pay back the debt. The loan will eventually be bought by other
investors anyway, so, the bank becomes merely a “middleman” between the
borrower, and the broader investment market.
Some people – our
President perhaps being the most high-profile among them – blame “greedy
bankers” for the mortgage market
collapse of last decade, yet Fannie and Freddie, complete with congressional
approval, played a role as well. While the intended agendas of these two institutions
may be worthwhile, they nonetheless
create a scenario where a whole lot of banking and financing power is placed in
the hands of politicians. That power can be used as a tool to accomplish the
short-term political goals of those politicians, and in the aftermath of the
2008 economic crisis, evidence emerged suggesting that this is a big part of
what happened.
In 2003, before last
decade’s real estate boom took-off, the Bush Administration repeatedly attempted
to introduce legislation in the Congress that would have significantly
reigned-in the lending behaviors of Fannie and Freddie. At one point in 2005,
after former U.S. Senator Chuck Hagel (R-Nebraska) introduced a GSE reform bill
in the Senate, Freddie Mac paid a Republican consulting firm$2 million to help
“kill” the bill. As a result, then-Senate Majority Leader Bill Frist (R-TN)
never allowed the bill to go to a vote, and it “died.”
In 2007, after the
run-up in real estate values and sales, President George W. Bush himself
proposed “subprime reforms” noting an alarming rise in subprime mortgage
defaults, but both Democratic and Republican members of Congress refused to
support those attempts (Democrats controlled both the House and The Senate by
then).
According to a report
in the August 5, 2008 edition of the New York Times, David
Andrukonis, the former chief risk officer for Freddie Mac, notified Freddie’s Chief
Executive as far back as 2004. Apparently there was knowledge back then that
Freddie was buying bad loans the likes of which “would likely pose an enormous financial
and reputational risk to the company and the country.”
Later in 2008, after the housing bubble had
burst, Freddie’s CEO Richard Syron stated in another interview that, “This
company has to answer to shareholders, to our regulator and to Congress, and
those groups often demand completely contradictory things.”
So if Fannie and
Freddie could be so easily manipulated by members of Congress, what could
possibly go wrong with efforts to “reform” the institutions? The supposed goal
of the Corker-Warner bill is to create a system that provides would-be borrowers with continued
access to long-term, fixed-rate mortgages (with some sort of government
guarantee on their loan) while limiting the risk taxpayers will ever face
losses. The fear of liberal Democrats is that if the government ceases to
guarantee private loans, a 30-year fixed rate mortgage will eventually be out
of reach to the middle class. Republicans, on the other hand, worry about taxpayers
subsidizing private loans and a continuation of the “too big to fail”
philosophy with select banks.
While the Corker-Warner bill seeks to
shut-down Fannie and Freddie, it nonetheless creates an entirely new
governmental agency, the Federal Mortgage Insurance Corporation (FMIC), which
would use taxpayer dollars to prop-up private loans. While many Republicans are
skeptical of the idea, a report from Reuters’ news indicates that U.S. Senator
Mike Crapo (R-Idaho), the most powerful Republican on the Senate Banking
Committee, is warming up to the idea and working closely with Committee
Chairman Senator Tim Johnson (D-SD).
Will replacing one government entity with
another actually improve the mortgage markets?
If politicians retain control over our wealth, they will most always
find a way to use it for their own selfish purposes.
Comments are invited!
Send feedback to: WatchDog
.
.
No comments:
Post a Comment