The Obama administration and a set of constituents who would seem to be its natural allies are currently at war over the festering problem of mortgages. The NAACP and the National Community Reinvestment Coalition (NCRC)—an association of more than 600 community based organizations— are among the groups that have turned on the government. At issue are Fannie Mae and Freddie Mac, the mortgage giants which have been in the clutches of the government ever since the financial crisis of 2008. The groups argue that government sponsored enterprises (GSEs) need reform now, in order to protect access to affordable housing. Surprisingly, they have been given the equivalent of the middle finger by Obama and company. But why?
Let’s back up a few years and set the scene: Fannie and Freddie are essentially giant insurance companies—they stamp mortgages made to American homeowners with a guarantee that they’ll pay the principal and interest if the homeowner can’t. This makes it possible to sell securities backed by homeowners’ monthly mortgage payments to investors. But as we know, in 2008 the inevitable happened. A lot of people were unable to make those payments. Both companies were placed into a state called conservatorship, in which they are run by the government and supported by a line of credit from the US Treasury Department. Then-secretary Henry Paulson called it a “time out.” In other words, it was supposed to be temporary, like putting a screaming toddler in the corner. Instead, it’s been the longest time out in history. Finally, in the summer of 2012, the Obama administration decided to sweep all of the two companies’ profits into the Treasury Department, where they can be used for deficit reduction. In effect the president nationalized the two GSEs.
Is this even legal? That is the question at the heart of a slew of lawsuits from unhappy Fannie and Freddie investors. The lawsuits are not incidental to this story.
This situation isn’t exactly stable, either. While the two companies have become very profitable—they’ve paid some $50 billion more than their $186 billion bailout back to Treasury—they are being drained of capital, which means they have no buffer in the event of losses. And as it so happens, Freddie Mac just reported a quarterly loss of $475 million, its first in four years. Progressives and civil rights advocates, from the NCRC to Al Sharpton, argue that the companies are too economically insecure to pursue their mission of fostering homeownership, and that lower-income and minority communities are being disproportionately affected.
Freddie’s loss—along with worries over what might happen to affordable housing when a new administration takes over in a year—has increased the pressure on the administration to act. In early November, the NCRC issued a report calling on the administration to allow the GSEs to recapitalize. That report came on the heels of an October letter to the president and other senior members of the federal government sent from the NAACP, the League of United Latin American Citizens, and the NCRC. They made the same ask: allow Fannie and Freddie to recapitalize.
“We fundamentally believe that you, Mr. President, are in the very best position to safeguard and protect homeownership for the working families and minority communities across the country who rely most on [Fannie and Freddie] for access to mortgage credit,” they wrote. The Community Mortgage Lenders Association and the Independent Community Bankers of America—whose members are scared of big banks taking over the market in the absence of Fannie and Freddie—have also joined the cry. “Siphoning off all earnings to the US Treasury unnecessarily puts both Fannie Mae and Freddie Mac in danger of failure once again,” wrote ICBA CEO Camden Fine on Nov. 4.
It’s an odd and possibly unprecedented accident of history, but these groups’ interests are sort of allied with those of hedge funds and other investors who own GSE securities. Theoretically, the investors would also benefit from a decision to allow the companies to recapitalize, because it would probably cause the companies’ stock prices to rise.
The Obama administration is not oblivious to the problem of the GSEs. But officials seem to be dodging the pressure by arguing that smaller fixes will not solve a problem this big. “Seven years after the crisis, the housing finance system remains the great unfinished business of financial reform,” wrote Antonio Weiss, the counselor to the secretary of the Treasury, in a Bloomberg View column published Oct. 19.
Meanwhile, there has been a coordinated to push to make it clear that the government will not bring Fannie and Freddie back in any way, shape or form. “We should pursue more comprehensive approaches to reform,” Michael Stegman, who was in charge of housing policy at Treasury and is now the housing expert at the National Economic Council, said on the same day as Weiss’s column. Treasury secretary Jacob Lew added, “We continue to believe that comprehensive housing finance reform is the only way forward.” Weiss, for his part, also wrote that the administration “wants to transition to a better system, one that provides broad access to housing supported by a sound and robust mortgage market, without exposing taxpayers to another rescue.”
Just last week, such sentiments were echoed in a piece written by Barry Zigas, a former Fannie Mae executive who is now the director of housing policy at the Consumer Federation of America. (A Treasury spokesperson referred Quartz to Zigas’s piece, saying that it “may help answer many of your questions.”) Zigas’s argument is essentially that we shouldn’t settle for a reformed Fannie and Freddie, because that system will inevitably have some of problems of the past, and possibly fewer of the benefits for affordable housing. Instead, he’d like us to seize this opportunity to start from scratch and build something better. He also argues that the groups arguing a recapitalized Fannie and Freddie would help affordable housing are mindlessly “embracing,” as he put it, the hedge funds’ arguments. (NCRC president John Taylor responded that it is “nonsense and disingenuous to suggest the hedge funds have any influence on us whatsoever.”)
Theoretically, Zigas is right: We should be able to do better. But if there’s a plan, no one outside of the administration knows what it is. And if history is any guide, there is not much of a plan at all. Indeed, it’s starting to look like this administration is simply hoping to run out the clock.
Reforming reform
When the Democrats pushed the Dodd Frank financial reform legislation through in 2010, they left Fannie and Freddie completely out for one main reason: No one knew what to do about them. Then, in 2011, Treasury released a white paper claiming to “lay out the administration’s plan to reform America’s housing finance market.” It did nothing of the kind. Instead, it offered three vague alternatives, recommended none, and required no action.
In 2014, bipartisan legislation meant to reform the housing system passed the Senate Banking Committee before stalling. Zigas argues that there was “remarkable consensus” around this legislation, but some critics viewed it as a give away to the big banks. The NCRC opposed it on the grounds that it did not do enough for affordable housing, and while some in the administration supported it, the White House did not put any political muscle behind passing it. A lobbyist in town tells Quartz that most people think the legislative path is dead, not just now but forever, making the talk of “comprehensive reform” somewhat laughable.
Given that, it is exceedingly strange that right before Thanksgiving, three other powerful trade groups, including the realtors, the homebuilders, and the mortgage bankers association, wrote to Congressional leaders and urged them to include a provision called, ironically enough, “Jumpstart GSE reform” in the final spending bill. “Jumpstart,” which is also sponsored by a bipartisan group of US senators, would prohibit Congress from increasing the fees Fannie and Freddie charge in order to fund other government spending—and make it impossible for the administration to unilaterally allow the GSEs to recapitalize. This “will ensure Congress has the final say in any comprehensive housing finance reform plan,” they wrote.
The new provision is either a last-ditch attempt to force Congress to act—or a vote to stick with the status quo, in which case the GSEs remain effectively nationalized, woefully undercapitalized, and taxpayers are on the hook for any losses. And why not? At least in the short term, it’s fine for the businesses of all of the groups that signed the letter.
One theory is that the “Jumpstart” provision, by making it impossible for the administration to act, removes some of the pressure. Since Congress won’t act either, nothing will happen, and the administration and Congress can point fingers at each other publicly while quietly maintaining the status quo.
In his recent speech, the National Economic Council’s Stegman listed ways in which “critical components of the future system” could be tested in the interim. He made important points. But he also gave no concrete steps for ending the conservatorship, ensuring continued access to affordable housing, or transitioning to a new system.
It’s possible that Treasury is trying to give the private mortgage securities market time to revive itself without Freddie or Fannie in the mix. Seven years after the financial crisis, there are some small green shoots, but housing analyst Laurie Goodman notes that the private label market, which hit $718 billion in 2007, plunged to $59 billion in 2008 and has not been above $64 billion since. In other words, there’s still a long climb back. It’s true that the GSEs are doing more and more deals in which they transfer some risk to the private sector, but it remains to be seen what would happen to that private capital in a time of market stress. “Say you have a little pool by the edge of an ocean,” one analyst tells Quartz. “You’re draining cups of water from the ocean into the pool. Are you making progress getting rid of the ocean? Sure! But you’ll never get there.” And it’s awfully hard for the private sector to know what role to play when the government hasn’t decided what its role will be.
There are also some more cynical—and plausible—explanations, all of which could be true. One is that the ugly legal fight between the investors and Treasury–all those lawsuits–means that the administration won’t consider any plan that might reward investors, regardless of whether it makes sense or not.
Another explanation has everything to do with the stream of money flowing into Treasury from the GSEs. “I think the government is hard pressed to give up that revenue, one person close to events tells Quartz. “It’s made life easier for them in lots of ways.” This person also thinks that personal animus to Fannie and Freddie is playing a role. “Everyone loves to kick the GSEs,” he says. “When they were in their prime, they rolled over a lot of people in [Washington]. Now, people are getting even. There’s a lot of that out there. I don’t care which side of the aisle you’re on.”
Which leads to the most depressing explanation of all: This is just plain politics. When the reform bill that eventually passed the Senate Banking Committee was in play, the midterm elections were approaching—and no one wanted to take a risk. Now, of course, there’s a much bigger election coming up. “My theory is that it’s a worry about how this will look politically today, rather than how it will look to historians down the road when middle class Americans can’t get mortgages,” says the NCRC’s Taylor. He points out that in some quarters, Fannie and Freddie still get all the blame for the financial crisis, and while that’s demonstrably not true, Democrats don’t want to risk being perceived as the party that let them off the hook. To head off that criticism when the election rolls around, Taylor says he’s heard the administration plans to remain inactive. If true, this means the problem will be inherited by the next Congress and the next president, whoever he or she may be. In a Washington where getting reelection trumps governing, it’s this answer that makes the most, saddest kind of sense.