Freedom Line Blog

Logan Beirne, Lecturer in Law and Fellow at Yale Law Schools, discusses the Treasury Department’s seizure of Fannie Mae’s and Freddie Mac’s net profits and why the “Net Worth Sweep” violates the rule of law.

 Listen to the interview here.

For weeks, CFIF has detailed the hazard presented by two proposed Senate bills – Johnson/Crapo and Warner/Corker – claiming to offer home finance “reform” of Fannie Mae and Freddie Mac.

It was therefore refreshing to see The Wall Street Journal reach the same conclusion this morning in its opinion piece entitled “Sons of Fannie Mae.”  While reform of Fannie and Freddie is indeed critical, the latest attempt from Senators Tim Johnson (D – South Dakota) and Mike Crapo (R – Idaho) isn’t the answer.  “The bad news,” it reads, “is that the Senators want to replace Fan and Fred with multiple private mortgage bond issuers that would each also have a  taxpayer guarantee.”

It continues:

While Johnson-Crapo claims to end Fan and Fred’s “affordable housing” requirements, the bill is larded with provisions to encourage and subsidize loans to non-creditworthy borrowers while driving up the price of housing.  The bill includes a new 0.1% tax on federally insured mortgages that will be distributed to housing slush funds across the bureaucracy.”

The bill also promises to continue subsidizing mansions that don’t need help:

On that point, Johnson-Crapo also ensures that the universe of loans eligible for subsidies will continue to grow.  Under their proposal, the FMIC could raise the size of mortgages eligible for federal insurance as home prices rise.  But it bars the agency from ever lowering this so-called conforming loan limit.  Guess what would happen the next time a President runs for re-election?

According to the National Association of Realtors, February’s median sales price of an existing U.S. home was $189,000.  Yet Fannie and Freddie offer mortgages up to $417,000 across the country and in high-cost areas they run as high as $625,500.  That means that with 20% down a borrower can get taxpayer help when paying more than $780,000 for a house.  In most places that’s called a mansion.

Beyond the obvious reasons wealthy buyers don’t need subsidies, the “jumbo” market for mortgages above the conforming limits has been thriving.  At times in the last year jumbo rates have been lower than conforming rates and even now are within four-tenths of a percent.”

Fortunately, the piece ends on a high note, highlighting superior alternative legislation from Congressman Jeb Hensarling (R – Texas):

Some of our friends say the political window to kill Fannie and Freddie is closing, and Johnson-Crapo is the only vehicle that can do so because it is the only one that has White House support.  We’re not so sure.  Texas Rep. Jeb Hensarling has a better reform in the House, and a GOP Senate might be able to cut a better deal next year.  The Senate should go back to the drawing board and come up with a reform that doesn’t use the demise of Fan and Fred to create a dozen mini-me replacements that could grow to become the same monsters.”

Well said.

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.”

In an op-ed published yesterday on The Hill’s Congress Blog, CFIF Sr. Vice President Timothy Lee writes how legislation advancing in the House and Senate to reform Fannie Mae and Freddie Mac fail to sufficiently protect taxpayers and private investors.

Specifically, Lee focuses on the PATH Act, sponsored by Representative Jeb Hensarling (R-Texas) in the House, and the Housing Reform and Taxpayer Protection Act of 2013, sponsored by Bob Corker (R-Tenn.) and Mark Warner (D-Va.) in the Senate.  Not only could both pieces of legislation “end up putting taxpayers at even greater future risk,” Lee writes, but in addition:

[B]oth proposed bills fall terribly short in terms of protecting the rights of private investors in Fannie and Freddie, many of whom were actively encouraged by federal regulators to take their risk.  Not only would it be inherently unfair for the federal government to undercut their bargained-for investment rights, it would also send a terrible signal to future investors.  When even Ralph Nader laments that the federal government unfairly threatens to turn those private investors into “zombies,” the impropriety of the government’s proposed course becomes even more obvious.

Accordingly, if Congress seeks to eliminate both GSEs, then using something approximating the existing bankruptcy process would be a far better option for all involved.  Under that process, the government, taxpayers and creditors would be treated more fairly, and taxpayers would not be stuck with trillions in liability.   While not ideal, at least that would constitute an orderly and transparent process, one that more closely adhered to the rule of law on which our society is ostensibly based.

Lee concludes by warning, “unless and until the bills are significantly revised, American taxpayers and private market investors stand to lose.”

Read the entire piece here.

Skim through this week’s commentary pieces here at CFIF, and you’ll notice that all of us at the Center are incensed by President Obama’s recess appointments to the NLRB and the Consumer Finance Protection Bureau yesterday, all of which seemed to clearly overstep the president’s constitutional authority.

According to the invaluable James Pethokoukis, however, we ain’t seen nothing yet. Writing at the American Enterprise Institute’s Enterprise Blog, Pethokoukis notes that there’s an ominous implication from yesterday’s appointments — that the president could use a similar tactic to appoint a new head of the Federal Housing Finance Agency. He writes:

And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process, here’s what might happen next, according to [the Washington Research Group’s Jaret] Seiberg:

“That could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election.”

Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen.

There are more grisly details in Pethokoukis’s original post. The upshot? President Obama — without approval from Congress — could commit taxpayers to a quarter-trillion dollars of spending in order to bail out imprudent homeowners in an election year. Essentially, we’d all be financing the president’s reelection campaign. And, in a tight race, the resulting bribe stimulus might just do the trick.

Dwight M. Jaffee, professor of finance and real estate at the University of California, Berkeley, points out in The Wall Street Journal that “Today 90% of the $14 trillion in outstanding residential mortgages is controlled by the Federal Housing Administration (FHA), the Department of Veterans Affairs, or Fannie Mae and Freddie Mac – with the latter two under government conservatorship.”

Ninety percent?  Wait a minute…  Doesn’t every dizzy big-government leftist from Barack Obama to Paul Krugman tell us that “deregulation” of the housing sector caused our economic difficulties?  The fact is that the housing finance market is one of the most regulated, not least regulated, sectors of the entire economy.  Thanks to Professor Jaffee, we are reminded of the sheer scale of that regulation, as well as the left’s efforts that fed the housing bubble.

You know it’s shaping up to be a bad year for Democrats when the congressman most associated with pressuring banks to accelerate the growth in subprime mortgages says he hopes government mortgage giants Fannie Mae and Freddie Mac are dead within a year.  House Financial Services Committee Chairman Barney Frank (D-MA) told CNBC host Lawrence Kudlow that he no longer supports “pushing lower-income people into housing they couldn’t afford…”

So what could be motivating Frank’s flip-flop?  Kudlow thinks it could be the rare example of a politician admitting his mistake.  I’m betting it has more to do with the rise of Sean Bielat as a serious contender to challenge Frank in the upcoming general election.

The same week Frank offered his mea culpa to Kudlow, Frank’s campaign staff circulated information that Bielat was formerly a registered Democrat before switching to the Republican Party.  The implication is that Bielat can’t be trusted because he switched parties.

But in an impressively worded explanation, Bielat manages to highlight his resume as a former House page, Marine and Harvard graduate, and why at each step along the way he was more and more conflicted with the Democrats’ liberal agenda.  There’s even a polite reminder that Ronald Reagan was once a Democrat until its leftward tilt helped him discover his inner conservative.

Frank is obviously concerned about Bielat’s appeal this year because of his line of attack on Bielat: Don’t vote for Sean; he used to be a Democrat.  Too bad for Barney, though, because he still is.

Below is one of the latest cartoons from Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

Because the mortgage giant’s former CEO Franklin Raines was trying to make yet another corrupt buck from his government perch.  After concluding his five year run as chief executive, Raines agreed to pay a nearly $25 million fine for Enron-style accounting gimmicks that netted he and other officers millions more in compensation.

Now, World Net Daily is reporting that Raines and others applied twice for the same residential cap-and-trade patent; the first time on behalf of Fannie Mae, the second time for themselves as private “inventors.”  Since the same people applied both times the second application supersedes the first, meaning any profits from the patent go not to Fannie Mae, but Raines & Co.

These distinctions matter because Raines – acting in his capacity as head of Fannie Mae – initially claimed to apply for the patent in order to give the mortgage backer a strong position in encouraging more “green” housing.  That claim proved phony when his second application guaranteed him a windfall if “comprehensive reform” ever came in the form of cap-and-trade legislation.

Sound familiar?  CFIF readers will recall a recent column discussing the same kind of self-enrichment in Obama’s Energy Department, and another analyzing the government’s inability to run any enterprise – and specifically Fannie Mae – like a business.

Who knew we’d get an example that combined them so soon?

As Goldman Sachs is reeled into court for potential securities fraud, a bigger fish is still swimming free and wreaking havoc on the public.  Freddie Mac, one half of the not-so-dynamic duo of government-backed mortgage peddlers, took another massive hit during the first quarter of the year.  The company, which is largely owned by the federal government after the 2008 bailouts, is set to ask for an additional $10.6 billion in “federal aid,” aka more bailouts.

With assistance and pressure from Washington to make housing affordable for all, one can see how Freddie Mac thinks that money grows on trees.  Unfortunately, all of us in the real world, from whom the government is funded, should be concerned how “We the Taxpayers” are going to come up with another $10 billion to flush down the toilet.  Not to mention why.

More troubling, while Goldman Sachs is getting grilled at congressional hearings, financial reform legislation, which unleashes a broadside against banks, but not a single provision addressing the troublesome Fannie and Freddie, will soon be ushered to a vote.  The Kansas City Star’s E. Thomas McClanahan stated it well:

“Wall Street’s excesses sent the markets and the economy off a cliff, but the seeds of the debacle were planted by politicians and richly fertilized by their creations: Fannie and Freddie…”

The shenanigans on Wall Street may or may not have brushed up against the law, but the opportunity and incentive would not have existed had the federal government and its lending arms, Fannie and Freddie, not insisted on giving mortgages to folks who could not afford them.  Congress should remember as they point a finger at Wall Street that four fingers are pointing back at them.

Below is one of the latest cartoons from Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.