As a financial-markets-muckraker for the New York Times, Gretchen Morgenson provides an important and valuable service, especially when you consider the depth of muck in that sector in recent years. But there can be a fine line between raking muck and pointing fingers at legitimate activity. I thought she at least partially crossed that line in a recent piece on housing finance, the fate of Fannie and Freddie, and the role of some former officials in the Obama administration in all the above.
First, caveats/disclosures. I worked on housing finance when I was with the administration back in its early days, and met regularly with David Stevens and Jim Parrott, both of whom are featured in the piece. I’m friends with Parrott and have highlighted some of his work here at OTE (e.g., here’s a video from a few years back of us discussing many of these same issues; true, these housing finance discussions can be mind-numbingly boring, but if that’s a crime, I get life w/out parole; Parrott gets the chair).
The gist of the Times piece is that some former Obama housing officials, including Parrott and Stevens, are trying to help the nation’s biggest banks take over the secondary mortgage market from the government-sponsored agencies (GSEs) Fannie Mae and Freddie Mac (currently in government conservatorship following large loan losses in the housing crisis) and that they’re using their White House connections to make that happen. That would be both ethically wrong and economically reckless.
But there are at least two problems with this story. First, it has long been the explicit position of the administration that once they leave conservatorship, the GSEs should be wound down and that the private mortgage market should play a much larger role in the new system. The Times story suggests that this is a debatable point—that Stevens, Parrott, et al are pushing for this policy outcome against those who would preserve the GSEs. But while there may well be advocates for the status quo, that’s not been the administration or Congress’s position for years now.
It is perfectly reasonable to worry, as Morgenson does and as we all should, that large banks will dominate that new role. But, and here’s the second problem with the piece, I’m not aware of any work by these former officials that advocates for this big-bank takeover, nor does the piece substantiate such a claim. Parrott has long held that it would be mistake to simply trade the GSEs for too-big-to-fail banks (see discussion around page 4 here where he talks about structuring reform in ways that protect smaller lenders). Remarkably, Morgenson even quotes him in the piece to that effect, arguing that it is essential to avoid “a market duopoly that’s got an implied government guarantee. It creates such a toxic mix of incentives where profit-seeking shareholders maximize risk and profit at the expense of taxpayers sitting there waiting to hold the bag if the thing goes south.”
I’m less familiar with the work of Stevens, who now heads the Mortgage Bankers Association, a lead lobbying organization for the mortgage industry. But from interactions I’ve had with him, he wants banks of all shapes and sizes to start lending to credit-worthy borrowers. That’s certainly a position that would help his organization—bankers don’t make money by not making loans. But if the Times has evidence of his thumb on the scale favoring the big lenders, versus any-sized lenders, I didn’t see it.
No question: “high level high-level housing finance specialists…have moved back and forth between public service and private practice in recent years.” Since they left the White House, Stevens, Parrott, and others have since consulted with administration officials. But again, that’s a legitimate activity as long as they’re not lobbying their former colleagues on issues in legislative play.
In this regard, it makes no sense to argue that these guys are trying to push the administration to wind down the GSEs and wind up private lending markets. That’s been the stated position of both the administration and Congressional majorities for years. So what’s the accusation here? If it’s that they’re trying to shift the GSEs business to the big banks and squeeze out the little guys, as I’ve said, there’s no evidence to that effect. If it’s that they’re providing administration officials, who believe me, can be insulated from the outside, with granular info on what’s going on in mortgage finance, that’s a good thing.
One charge that struck me as completely plausible was that while these officials were in the administration, and the same could be said for anyone, present company included, the privileged had greater access to them than others. That’s less a revolving door problem than a pay-to-play problem, one that looms large in our politics.
Experts in arcane areas like housing finance will often work in their area both in and out of politics. And Morgenson is absolutely on-point to worry that those who write the rules, those who must obey the rules, and those who enforce the rules, are often much too close to each other, if not the same people. But that’s not what’s happening here, and if anything, we want experts inside and out helping to move us to a system of housing finance that’s a lot fairer, more robust, less prone to bailout, and less centralized than the one we’ve had.