Fake crisis needed to prompt reforms at the GSEs

In a cynical example of bad governance, lawmakers created circumstances that will result in a crisis providing them political cover for their actions.

keep_the_gsesWashington is so polarized that politicians need a crisis to get anything done. To that end, politicians created circumstances at the GSEs likely to result in a future crisis that will generate need for political action. Concerned citizens hoping for careful deliberation and a consensus solution (good governance) will be disappointed.

Everyone in Washington knows the GSEs must be eliminated because the GSEs can’t exist outside government conservatorship. The taxpayer liabilities from backing most mortgage loans are enormous, and taxpayer backing for the GSEs ensures the misallocation of credit. Ed DeMarco prepared for final shutdown of GSEs, but the final implementation was left to Mel Watt and Congress, but they failed to make any progress.

After earning billions in profits, Fannie, Freddie reform further than ever

By Ruth Mantell, Published: Aug 10, 2015

WASHINGTON (MarketWatch) — Despite years of hand wringing on Capitol Hill over the need to protect taxpayers by reforming the U.S. housing-finance market, it may take a financial hit to mortgage giants Fannie Mae and Freddie Mac to spur decisive congressional action.

It’s been almost seven years since the government sponsored enterprises were put into conservatorship, but U.S. lawmakers have yet to approve a plan that replaces the companies and rebuilds the country’s housing-market infrastructure. It’s a huge, complex undertaking, and no elected official wants to be the one who gets reform wrong.

“They are concerned with the unintended consequences,” said Isaac Boltansky, an analyst at Compass Point Research & Trading, a Washington-based investment firm. “None of these guys want their name attached to a bill that helped tank the mortgage markets.”

This is why the bill either needs a visionary leader or a crisis. A visionary leader would have the courage of his convictions. Absent that, a crisis gives the herd political cover for any mistakes because they were “forced” to act by outside circumstances — even if they created those circumstances themselves.


Fear of failure isn’t the only obstacle to reform. Some U.S. lawmakers may be loath to revamp a system that has helped the government to narrow its deficit. A bailout arrangement forces Fannie and Freddie to send their profits to the U.S. Treasury Department each quarter. The GSEs have sent more than $50 billion to the Treasury than the bailout funds they received.

Last week, Fannie Mae reported a $4.6 billion second-quarter profit, and Freddie Mac reported a $4.2 billion second-quarter profit.

Politicians are fond of free money.


With windfalls like these, some officials are more interested in maintaining than slaughtering their cash cows. …

“It makes the government even more reliant on the GSEs as a source of funding for government programs,” analysts with Keefe, Bruyette & Woods, a New York-based investment bank, wrote in a research note.

The government will drain every resource possible from these entities leaving an empty carcass for the investors.GSE-warning

Here’s why the companies may take a financial hit in the foreseeable future. Their bailout agreement with the government prevents Fannie and Freddie from building capital, and forces them to narrow their capital buffer until it reaches zero by 2018. The idea is to gradually move Fannie and Freddie closer to winding down, spurring legislative reform.

Not only will the companies’ eventually have no capital buffer, their quarterly earnings are volatile, dependent on economic fluctuations that impact their revenue streams and derivatives held to hedge fluctuations in interest rates. …
“It won’t take much, they are very close to needing a draw already,” said David Stevens, president of the Washington-based Mortgage Bankers Association. “Any aberration can cause a draw.”

The hysterical headlines generated the day of the draw announcement may be a powerful enough prod to move lawmakers to action, experts said. However, a time of panic isn’t ideal for legislating, said Jim Parrott, a former housing-policy adviser for the White House’s National Economic Council and a senior fellow at the Urban Institute, a Washington think tank.

We’re just putting off the inevitable, letting an unpredictable market dictate our timing and making it likely that when we finally do struggle with this difficult topic it’s in a moment when no one will be thinking straight,” Parrott said. …

American_ExcessI find this reprehensible. Policymakers intentionally set up circumstances that will create a crisis in order to give them political cover for their actions.

Is creating crisis anyone’s idea of good governance?

“Unfortunately, all the signals would suggest that there’s no reform imminent [by Congress],” Cisneros said. “It’s my hope that Mel Watt, who has done a thoughtful job with respect to consumer protection and creating the conditions for a stable housing market, will remain on the job.”Ed DeMarco, the former head of the GSE regulator, said Watt’s greatest challenge will be ensuring ongoing liquidity and stability as markets await congressional action to end the conservatorships.

“With the uncertain timing and outcome of such legislation, making long-term business judgments as conservator is very challenging,” DeMarco said.

Is this anyone’s idea of good business management?

Home finance reform is inevitable. The GSEs can’t operate forever under the constraints of conservatorship, and lawmakers set up circumstances guaranteed to fail to provide the political cover necessary to act. Hopefully, when the crisis hits, lawmakers implement the right solution. After seven years studying the situation so far, lawmakers have no excuse for mistakes.


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