Freedom Line Blog

We at CFIF have highlighted the grave flaws in two proposed Senate bills – Corker/Warner and Crapo/Johnson – that constitute defective efforts toward housing finance reform.

Instead of proposing sensible free-market answers that could benefit taxpayers while adhering to rule of law, the legislation does neither.  Rather, it reinforces the Obama Administration’s big-government overreach that disrespects our legal system and the people it seeks to protect.  And by creating yet another new federal agency to regulate the mortgage market, Crapo-Johnson uses similar mechanisms that Corker-Warner does.  In so doing, it maintains the same market uncertainty that Corker-Warner does, without any guarantee for future investments into the government-backed agency.

Further, the proposal continues to disregard investors’ rights – the community banks, pension funds and individuals that supported Fannie and Freddie, before, during and after the bailout.  Under Crapo-Johnson, those investors remain left out in the cold, their savings and retirement in limbo.  Meanwhile, taxpayers would remain on the hook because the full faith and credit of the U.S. government would backstop the newly-created entity under Crapo-Johnson.”

Writing in today’s Wall Street Journal, Graham Fisher & Co. managing director Josh Rosner cogently echoes our position.  Of particular note is the way in which Mr. Rosner highlights how the proposed bills offer the false promise of “bipartisanship”:

So why are legislators designing a new system that risks a fragile housing recovery, creates explicitly guaranteed supports for new government-sponsored enterprises, relies on phantom capital, and recklessly endangers the public?  Perhaps the answer is the housing industrial complex — that web of affordable-housing groups that want to deliver loans to “underserved” markets, lenders and other private participants that profit from higher mortgage volumes, and the politicians who like the illusion of homeownership.

As for those politicians, this bill provides something for everyone on both sides of the aisle.  The Republicans get to wipe out Fannie and Freddie, punishing their longtime Washington enemies for past political sins.  Meanwhile the Democrats can avoid future political attacks by hiding government support for housing in a new opaque system that looks remarkably like the one that failed miserably a few years ago.”

As Rosner concludes, and as we agree:

The Johnson-Crapo bill reinstates a model in which private players profit from public government support.  If it becomes law, we will have failed to create a sustainable system of building home equity, even among the most at-risk, lower-income borrowers.  We will also have failed to fulfill the real American dream of homeownership.”

The Senate Banking Committee’s chairman and its ranking member – Senators Tim Johnson and Mike Crapo, respectively – released their version of housing finance reform on Sunday.  Unfortunately, their bill largely duplicates the problems already found in the proposed Corker-Warner legislation.  Both proposals – focusing on Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs) – have been touted as a bastion of bipartisanship, but both fail miserably at upholding the rule of law or the rights of property owners.

Instead of proposing sensible free-market answers that could benefit taxpayers while adhering to rule of law, the legislation does neither.  Rather, it reinforces the Obama Administration’s big-government overreach that disrespects our legal system and the people it seeks to protect.  And by creating yet another new federal agency to regulate the mortgage market, Crapo-Johnson uses similar mechanisms that Corker-Warner does.  In so doing, it maintains the same market uncertainty that Corker-Warner does, without any guarantee for future investments into the government-backed agency.

Further, the proposal continues to disregard investors’ rights – the community banks, pension funds and individuals that supported Fannie and Freddie, before, during and after the bailout.  Under Crapo-Johnson, those investors remain left out in the cold, their savings and retirement in limbo.  Meanwhile, taxpayers would remain on the hook because the full faith and credit of the U.S. government would backstop the newly-created entity under Crapo-Johnson.

Since becoming profitable in 2012, Fannie and Freddie have not only made taxpayers whole, they’ve made the government billions of dollars following confiscation by the Treasury Department.  Instead of following the rule of law and marketplace standards, Crapo-Johnson would codify that illegal taking and perpetuate the federal government’s dangerous habit of undermining property rights and sowing uncertainty.  That’s not what our housing market, or our economy generally, need.

You can try to put lipstick on a pig, but you’re not fooling anyone:  Crapo-Johnson is more of the same.