In the run-up to the financial crisis, Fannie Mae and Freddie Mac were more powerful than Congress, as they were able to keep it from enacting reform until July 2008, a mere two months before the government-sponsored enterprises were placed in conservatorship and received a massive taxpayer bailout. They were more powerful than the Federal Reserve, pushing back on former Chairman Alan Greenspan’s efforts to rein them in. And they were more powerful than the president, successfully fighting the Bush administration’s efforts to rein them in. In short, the GSEs placed themselves above the government that created them, making them a danger to democracy.
In a report the Office of Federal Housing Enterprise Oversight (the GSEs’ regulator from 1992-2008) sent to Congress on April 15, 2008, it noted a March 2008 pact under which “both Fannie Mae and Freddie Mac agreed that a ‘world-class regulatory structure’ is needed and ‘renewed a shared commitment to work for comprehensive GSE reform legislation.’ ” As already mentioned, Congress passed such GSE reform legislation a few months later in July.
Notwithstanding a new “world-class regulatory structure” under the Federal Housing Finance Agency, the GSEs are once again growing in power and continue to be the biggest of the “too big to fail” companies. Case in point, the combined assets of the GSEs are about equal to the combined assets of the nation’s three largest banks. If not reduced substantially in size, they will continue to be a danger to the country and certainly too dangerous to allow out of their respect conservatorships.
How have the GSEs grown in power? With nearly $5.5 trillion in taxpayer guaranteed debt, they acquire 50% of all newly originated single-family loans (and another 30% is controlled by other federal loan guarantee agencies). Tellingly, in 2018 about half of the GSEs’ single-family loan acquisitions related to loans under the conforming loan limit and used to purchase a primary residence. The rest involved cash-out and rate/term refinances, second home and investment property purchases, and loans with jumbo loan amounts. In addition, the GSEs acquired 47% of multifamily loan originations, up from 32% as recently as 2013. And once again, Fannie and the Federal Housing Administration are in a competition to loosen underwriting standards, as both chase so-called affordable housing loans, which makes homes less, not more affordable.
Finally, while in conservatorship, the GSEs have spent billions on new technology, a common securitization platform only they can use, developing and filing patents, entering into new business lines to compete with privately owned businesses, building proprietary data sets from data provided by their own customers and creating vast amounts of intellectual property. To this last point, Fannie has filed or received over 100 patents since entering conservatorship. These expenditures came from funds that would have otherwise have gone to taxpayers.
How does this happen under the watchful eye of the FHFA, the new “world class” regulator and conservator? The simple answer is the GSEs are more powerful than their regulator.
The only logical solution is to keep them in conservatorship and immediately begin to shrink them by administrative action. This can be done by following the precedent set by former acting FHFA Director Ed DeMarco. His annual scorecards resulted in shrinking the GSEs’ multifamily businesses so as to stop crowding out the private sector, led to increases in the guarantee fees charged on the GSEs’ single-family loan acquisitions, aligned fees so as to price for loan risk and largely eliminated the acquisition of loans with risky, very low down payments.
The Senate Banking Committee has favorably reported to the full Senate the president’s nominee Mark Calabria to be the FHFA’s next director. Once confirmed, Calabria should immediately issue a revised score card, one that calls for tightened single-family and multifamily underwriting; higher guarantee fees that are also more risk based, over four to five years; a significant shrinking of the GSEs’ gigantic single-family and multifamily market shares; an examination of all programs, particularly expansions undertaken during conservatorship; and remedying all GSE data monopolies, intellectual property ownership and technology that serve to restrict private competition or provide the GSEs an unfair advantage.
By promptly taking these actions, director-designate Calabria will help make housing more affordable, reduce taxpayer liability and enhance competition.