Housing Finance Reform, Corker-Warner and the Bermuda Triangle

I attended an excellent panel discussion at the Heritage Foundation in Washington D.C. today on GSE (housing) reform. The speakers were Mark Calabria (Cato), Alex Pollock (AEI), Arnold Kling (former Freddie Mac employee) and Josh Rosner (Graham-Fisher).

All speakers agreed that the government guarantee should be eliminated on residential mortgages. Essentially, the US over invests in housing to the detriment of other aspects of the economy. Sure, we got a bubble in house prices and homeownership, but we also neglected building factories and the rest of the economy (choosing instead to import goods from abroad). Here is the result of over investment in housing: a bubble and burst.

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Where do we go from here? Perhaps it is better to take an existing model (like the savings and loans or Fannie Mae / Freddie Mac) and tweak them. To create organizations from scratch for housing regulation is daunting (look at how many mistakes regulators of Fannie Mae and Freddie Mac have made, and Fannie Mae has been around since President Franklin Delano Roosevelt). There must be a better solution. Given that Fannie Mae and Freddie Mac are in conservatorship with FHFA indicates that creating a stable enterprise for mortgage finance is harder than it sounds.

The discussion turned to Corker-Warner (aka, Porker Warning!). If Corker-Warner sticks to 10% capital (or skin-in-the-game), it would be an improvement over the current model of Fannie Mae and Freddie Mac. But it will eventually be watered down to 5% … or less. But the Corker-Warner legislation contains … affordable housing goals, the same torpedo that sank Fannie Mae and Freddie Mac.

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The problem with Fannie Mae, Freddie Mac and the Corker-Warner legislation is that it is reform by repeating the same mistakes. Affordable housing goals have not really helped American families (unless you think putting Americans in homes that they can’t afford and then go into default is good housing policy). Corker-Warner creates a NEW government insurance agency (to replace the Federal S&L Insurance Corporation which were replaced by Fannie Mae and Freddie Mac). But like the movie Idiocracy, we have had government policies promoting homeownership in the same way that Brawndo was sprayed on crops … and killed them).

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Homeownership in the “S&L / Fannie Mae and Freddie Mac” period has ranged between 61.90% in 1960 and 66.90% in 2010. That is an increase of 5% in homeownership at a staggering cost in terms of house price collapse and defaults.

If not Corker-Warner, then what? My suggestion is simple. Keep Ed DeMarco as FHFA Director and let him continue regulating and modernizing Fannie Mae and Freddie Mac. That includes building the uniform securitization platform and gradually lowering conforming loan limits. In the short run, that is the best solution in my humble opinion.

Josh Rosner made an excellent point that under Corker-Warner, the community banks are virtually left out in the cold and would end up being loan originators for the biggest banks. And take all the origination underwriting risk.

But as Alex Pollock of AEI pointed out, we are constrained by the Housing Triangle (Fed, Treasury and Fannie Mae/Freddie Mac). They are really one in the same. Fed prints money and purchases GNMA, FNMA and FHLMC MBS. Then they go to Treasury if they lose money. I like to call this the Bermuda Triangle when taxpayer money vanishes without a trace.

Ideally, I would recommend scrapping affordable housing mandates and government insurance of residential mortgage loans, but the Senate is in Democrat control as is the Administration. I would furthermore suggest a housing finance reform bill that is even more free-market, less crony-oriented than the House’s PATH bill which still contains guarantees.

Of course, the panelists discussed much more than the points I have highlighted. It was a tremendous event and very educational.

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P.S. Speaking of Brawndo, how about the success of The Fed’s monetary stimulus in creating jobs?

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