Not every door is a revolving door: Housing finance, GSE reform, and the NYT

December 9th, 2015 at 3:51 pm

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.

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10 comments in reply to "Not every door is a revolving door: Housing finance, GSE reform, and the NYT"

  1. Robert Salzberg says:

    Great post till the last substantive phrase: “less centralized than the one we’ve had.”

    Fannie Mae and the FDIC were both created because trusting the decentralized banks and bankers with our cash and mortgages was an unmitigated disaster.

    Privatization of Fannie and Freddie also ended in disaster.

    Centralized mortgage insurance works. Furthermore, our military, police, firefighters, national flood insurance, beach re-norishment programs, FEMA, etc directly provide benefits for homeowners. Throw in the $200 billion or so in additional spending on tax deductions and FHA.

    The macro picture is that we spend at least a couple of percentage points of GDP directly subsidizing home ownership. So we are already paying a perpetual 2% mortgage payment. Isn’t it in our collective best interest to set up the rules for the loans, back most of the loans under specific guidelines, and prevent the Free Market from screwing the taxpayers?

    The Free Market has spectacularly failed both times in the last century that we allowed it to control our mortgages. What evidence is there that less centralization is better? (Of course, centralized loans written by tons of small banks is what I’m advocating for…)

  2. Marko says:

    “That’s less a revolving door problem than a pay-to-play problem, one that looms large in our politics.”

    C’mon , Jared. They’re two sides of the same coin. You do a good job for the elites during your time in gov’t , you get handed the proverbial bag of cash when you subsequently move into the private sector. Then after a stint of hugely-overpaid private sector work , you’re offered another huge bag of cash as incentive to move back to gov’t , along with a list of new tasks to complete , of course.

    Apologies and/or justifications for this system of legalized bribery is exactly what I DON’T want to hear coming from presumptive “progressives” during election season. This is the kind of crap that makes Trump look respectable , which is no mean feat.

  3. David in NYC says:

    “It has long been the explicit position of the administration that once they leave conservatorship, the GSEs should be wound down…But while there may well be advocates for the status quo, that’s not been the administration or Congress’s position for years now.”

    Neither the Administration nor Treasury nor FHFA has the legal power to wind down the GSEs, and Congress has voted on nothing that might give them the authority. The conservator is legally obligated to restore the soundness and solvency of both companies.

    It’s quite a stretch to say that this has been Congress’s position when no one has voted on anything.

    The reason why this subject is grabbing a lot of attention now it’s because no one with a passing acquaintance of corporate governance, insolvency law, the statues governing Fannie and Freddie, or financial management finds it anything but absurd to drain two undercapitalized institutions of all equity by way of cash dividend distributions.

    Both Geithner and Michael Stegman have been spreading a lot of disinformation about the GSEs.

  4. Bill Maloni says:

    Jared–After seven years, I just stopped publishing a regular GSE blog, so I feel comfortable commenting on the issues you raise.
    Nothing I’ll write here is different then exchanges I’ve had with David Stevens. And, for your purposes, remember, inside the Beltway, the Devil always is in the details not the grand generic statements about who is for what and why?
    I believe the positions Stevens–and the trade association–have taken support the largest financial institutions, mainly the nation’s biggest banks, to the detriment of his smaller members, both banks and mortgage companies, which have an ongoing fear of being consumed by their larger brethren.

    Both the original Corker-Warner bill and it’s progeny, the Johnson-Crapo legislation–both of which strongly backed by the MBA– bill would have done away with the GSEs overtime some undefined time frame and given tremendous market power to the big banks. It was one of the reasons the bill failed in the Senate.

  5. Adolfo Marzol says:

    I have had extensive first hand interactions with both Dave Stevens and Jim Parrott, both as government officials and in their subsequent private sector roles. In none of those discussions has either ever seemed to favor a system that would be dominated by large banks at the expense of smaller lenders and independent mortgage bankers. In fact, just the opposite. And, from my interactions with the administration of President Obama, I don’t believe that any policy proposal that would be understood to cause such an outcome has ever been given, nor would receive, serious consideration.

    In response to the comments from my friend Bill Maloni, my perspective on both Corker-Warner and Johnson-Crapo was that at their core these were plans seeking to replace the two current GSEs with some larger number of “private” entities providing the same core mortgage securitization services to the broad market with more competition. More competitors than just two was thought to be beneficial, for reasons including structural changes that would allow for greater policy flexibility to let these new entities fail in the next crisis versus having to be bailed out. Each plan had strengths and weaknesses, and clearly to this point no “comprehensive reform” legislative proposal has found (or is likely to find) the very delicate balancing of interests needed to garner the political and policy support necessary to replace the status quo. Comprehensive reform should be deferred for now, in favor of transition-focused reforms that can be tested and implemented gradually in ways that reduce taxpayer risk and increase the role of the private sector without loss of mortgage credit affordability or access.

  6. Chris Lowery says:

    The two fundamental dilemmas that remain unresolved in bank mortgage lending are (a) the classic “borrow short” (deposits as the source of capital)/lend long (potentially multi-decade mortgage loans, with truly indeterminate terms), and (b) the fact that homes will continue to constitute the great bulk of ordinary American families’ wealth. While the administration and Congress may very well want to eventually divest themselves of responsibility for financing this almost sacred (to ordinary Americans) asset, there’s a strong argument to be made that the public commonwealth, as the primary determinate of short term interest rates, and the ultimate source of capital, MUST continue to play a central and ongoing part of this function. In fact, it may be that government should never have created the fiction of a privatized Fannie. Had the government bought S&L mortgage debt at par several decades ago, we might have been spared the trauma (and cost) of the S&L debacle, and more recently we might have avoided the more dangerous aspects of the subprime mortgage meltdown.

    Unless and until someone can make a compelling argument on other than ideological grounds for why the government should be out of the housing finance business, I for one remain skeptical of all “privatize the GSEs” talk. Maybe this is at the heart of Gretchen’s concerns…

    • Jared Bernstein says:

      Like many comments here, this one is sensible and persuasive re how we should think about restructuring a secondary mortgage market, particularly re the public/private split. I tried to be careful not to get into this in the post, however, which wasn’t about the substance of the argument beyond these two key points:
      –The Obama admin has long been on record as wanting to unwind Fan/Fred
      –There’s no evidence I know of that Parrott/Stevens had a thumb on the scale for the big banks.

      Re the first point, this is from the admin’s 2011 white paper on these issues:
      “The Administration will work with the Federal Housing Finance Agency (“FHFA”) to develop a plan to responsibly reduce the role of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the mortgage market and, ultimately, wind down both institutions.

      There’s been lots of Twitter traffic on this too, with most of it about the path reform should take. That’s obviously a critical question but not so much the one I was getting at in the post.

      • David in NYC says:

        Geithner’s White Paper says GSE abolition is the starting point for any type of housing finance reform. He just makes this statement as if it were an uncontested fact, like the Laffer Curve or Saddam’s nuclear weapons lab.

        He proposes radical transformation of the system, with untested ideas, without any empirical examination of what went wrong. Geithner and his cohorts engage in a vast conspiracy of silence about loan performance data, which shows that, for 40 years, using any metric, GSE loan performance has always been vastly superior to that of any other segment of the market.

        I defy you to find any writing by any GSE critic, who proposes winding down the GSES, who compares GSE loan performance with anyone else in the market. Recovering your principal with interest is the sine qua non of capitalism, a yardstick that Geithner and his cohorts choose to ignore.

  7. Adolfo Marzol says:

    The complexity of addressing housing finance reform is grounded in the fact that the GSEs played 4 fundamental roles in the market; (1) long-term investor in the interest rate risk of mortgages by holding them on balance sheet (2) credit risk bearer of mortgages through their credit guaranty (3) the infrastructure of mortgage securitization connecting lenders to MBS holders and (4) the provider of an implicit government guarantee of timely payment to global investors in GSE MBS. Within housing finance, there is a strong consensus that role (4) must become an explicit government guarantee, because risk averse global investors post-crisis will no longer accept an implicit guarantee and because sound policy argues for being explicit about risks to taxpayers that are implicit. The hard questions revolve around who should play the other three roles, and as importantly, how the system could effectuate a transition to anything new given the entrenched scale and complexity of GSE operations. That is why I advocate for gradual transition steps that move in the right direction and that can be implemented without disruption to the operation of the market. All other actions will be resisted because the US mortgage market cannot fail to operate, much like the banking system cannot fail to operate, and market participants whose livelihoods depend on the operation of the system will naturally oppose untested and risky change (and so should mortgage borrowers).

  8. Smith says:

    The administrations and congress’s position to wind down the GSEs is … ill advised… and would further enhance the control, power, and profits of the banks, especially the larger ones. They would not be willing to assume responsibility for any part of the services offered if they weren’t going to make more money. That means more money not just in absolute terms but in percentages, profitability. There is no competition, I can’t easily start a bank the way I can start a news blog, coffee shop, or even contract out small manufacturing.
    Krugman has argued banking must become smaller and less profitable and boring. Winding down the GSEs doesn’t do that. Making them more like a private enterprise years ago did not help their performance.
    Mortgage backed securities are pretty suspect to begin with, how do you speculate on an asset which typically takes months to sell? Average time on market, in good markets, are three months. Perhaps better ways should be created to produce more money available to home buyers than speculative securities that are not liquid in the extreme.
    Everything I’ve read also says kiss goodbye to the 30 year mortgage without GSEs, a key to post war middle class success, and lower inequality.