What Hath Dodd Wrought?
July 14, 2008
The comprehensive foreclosure relief and GSE reform bill has finally passed the U.S. Senate, after an embarrassingly long floor debate. It now heads for an inevitable conference with the House over differences in several areas. And the White Houses's 11th hour request on July 12 to add new authorities to back up Fannie Mae and Freddie Mac promises to make the final discussions even more stressful.
It's ironic, then, that one of the centerpieces of the new legislation in both houses is the establishment of an "affordable housing fund" to be financed through a new tax on the two GSEs.
The so-called "Housing Trust Fund" established by the Senate's Federal Housing Finance Regulatory Reform Act of 2008 would require 4.2 basis points of both Fannie Mae's and Freddie Mac's new business to be diverted into a fund. The idea to require both Fannie and Freddie to devote a specific amount each year to develop and preserve affordable housing is terrific. Properly structured and designed, such a requirement could force the GSE's into more active and meaningful participation in affordable housing preservation and development. It would leverage the unique position the two companies occupy in the housing finance system.
But the trust fund in both the House and Senate bills instead turns Fannie and Freddie into piggy banks, siphoning off money from their operations to provide cash for others. This is like leaving a high powered luxury automobile parked in the back yard to use as extra seating for barbecues.
The Senate bill adds insult to injury by requiring the funds in the first year after authorization to be devoted to paying the costs of a new FHA mortgage insurance scheme designed to help struggling homeowners escape crappy subprime mortgages. Instead of bringing the substantial power and expertise of the GSEs to create new value for residents and communities, the bill turns them into the funders of FHA's full faith and credit guarantees that help subprime lenders unload their soon-to-be-nonperforming loans onto the FHA, where many may fail anyway in spite of better terms.
This is especially ironic considering that the White House now asked Congress to give it the authority to explicitly back Fannie Mae and Freddie Mac.
This perversion of the affordable housing fund idea was promoted by Banking Committee Ranking Member Sen. Richard Shelby (R-AL) and other Republican members. Thus the Senators expressing the most concern over the GSE's ties to the federal government are the ones to make them the FHA's banker!
The House-passed GSE reform bill also establishes a fund. Its version would divert the money first to Hurricane Katrina needs, and then to a "National Affordable Housing Trust Fund" to provide capital for extremely and very low income housing.
Housing advocates cried foul over the Dodd-Shelby "highjacking" of the trust fund. But anyone who thinks this is the last time Congress will find a more compelling use for this money than a dedicated fund for extremely low income housing subsidies is ignoring the totally unbalanced budget and the looming fiscal crisis that is going to make the Donner party look like a polite little buffet dinner among friends.
How did this happen? How did advocates struggling with inadequate funding, growing needs for inventive and sustainable approaches to affordable housing preservation and development, and the opportunity to increase the GSE's relevancy and attention to these issues get sidetracked into a bidding war with every special interest and short-term funding need that comes across Congress's radar screen?
And how did Fannie Mae, in particular, which only 15 years ago was the envy of HUD Secretary Henry Cisneros for its ability to set big goals and bring huge resources to bear on housing problems, find itself cut down to no more than an ATM for every special interest in the housing community? My short list of reasons follows.
Who's your daddy?
Housing advocacy organizations have splintered off into interest sections, whether for trust funds, state housing agency allocations, technical assistance grants, or CDFI capital. There is no unifying, strategic voice within the advocacy community that sees past these important but tactical issues to the larger strategic directions of the housing market.
Thus, Fannie and Freddie become most attractive not for the role they can play in development, but for the cash they can provide to fund other people's priorities.
Sadly, I believe this approach is going to weaken the GSEs' own interest in affordable housing and community development and isolate them further from a strong focus on their missions. It will foster an attitude of "we gave at the office." It will embolden those in the companies who think that the companies' mission is a burden to be endured rather than a calling to be embraced, enhanced and pursued. It is much easier for these companies to write a check than it is for them to actually use economically sustainable strategies to produce and preserve affordable housing.
In addition, advocates' promotion of this new surtax and Congress' willingness to divert it to the crise du jour will reinforce private equity analysts' view that these companies are in eternal danger of having shareholder value siphoned off to meet funding shortfalls for congressional pet projects or causes. This will offer a much more limited upside for investors who provide the capital that makes the GESs' world go ‘round.
Good friends are hard to find
The GSE's have no friends today. How did this happen? After more than 15 years of active cultivation of new partners, sponsorship and partnership of new initiatives and programs, and adopting fundamental and progressive changes in underwriting and financing, why are they so isolated today? When enemies in Congress who adjure the very thought of a government sponsored enterprise layer new, highly restrictive requirements on the companies that would raise their capital and hamstring their ability to innovate, where are the advocates who would benefit from a more active GSE role?
Maybe it's because these companies are complicated, and it's too hard for busy advocates to fully understand. Maybe it's because their real value always has lain in their key importance to the mortgage finance system, rather than to any one part of it, so that no one feels they "own" the issues. Maybe it's because large commercial banks and others who are anxious to strictly limit the GSEs so they can maximize their own participation and profit at consumers' expense are also courting public opinion and have left the GSE's erstwhile friends neutered. Whatever the reason, the lack of strong, strategic and well reasoned advocacy on behalf of the GSEs and their mission is troubling.
Home alone
If the GSE's have no friends willing to speak up for them, maybe it's because of their own alarming unwillingness or inability to speak up for themselves. The transformation of these companies from swaggering buccaneers to shrinking violets is startling.
Fannie Mae's and Freddie Mac's own attempts to forge a trust fund design that would enable them to control the funds and use them to leverage their other investments were hesitant, conflicted, and ultimately too late. In order to avoid aggravating their newly empowered regulator, they have withdrawn into a haze of "no comment" and no self promotion. Humility is a virtue, and it was definitely in short supply during the 1990s and early 2000's.
But an excess of timidity in the pursuit of tranquility is no virtue, to badly paraphrase Barry Goldwater. Maybe there's much more going on behind the scenes than an outsider like I am now can appreciate. But their lack of clear public leadership and advocacy on their own behalf has given their former friends and colleagues a free pass to decamp from the battlefield, as well.
Roll the dice
Because both the House and Senate have cleverly tied the new GSE legislation to a modest rescue package for at-risk homeowners, ultimate passage of these bills into law before the election is a virtual certainty. Others have written with great passion about the new regulatory structure's shortcomings and dangers. Sober analysts might easily conclude that the country is better off waiting for a new Administration before adopting a new regulatory regime. The bitter ideological underpinnings of the Bush Administration's GSE policy might be weakened. A stronger Democratic congressional majority in both houses could make a more reasoned and less vindictive set of policies possible. But I predict hotter heads will prevail. Congress is sick of more than four years of considering these bills. The GSE's seem resigned and more anxious to have this water torture ended than to expend scarce political and regulatory capital on a principled stand.
Advocates will get their "trust fund," minus the funds for now. And the housing community will have missed a major opportunity to reshape the most powerful economic forces in the housing economy into a more progressive and active partner. It's a roll of the dice on an uncertain future. Let's hope it doesn't come up snake eyes.