Obama administration morons still trying to implement failed 1930s progressive economic theories.
A Rogue Treasury Department Turns Toward the 1930s
The president shouldn’t allow an Obama appointee to guide housing finance policy toward disaster.
Peter J. Wallison
Jan. 23, 2018 7:40 p.m. ET
First, the good news: A group of senators are working on a bill to repeal the government charters of Fannie Mae and Freddie Mac , according to a report last week in the trade publication American Banker. This would set the U.S. on a course toward a private system for financing mortgages. Now, the bad news: The Treasury Department wants to return to the regulated market that caused the financial crisis.
At first this might seem implausible. The aggressive deregulatory work of the Trump administration has stimulated the U.S. economy, but its Treasury Department is pushing for more extensive regulation of the housing-finance market. Among conservatives, there’s an emerging view that the Treasury Department is on a frolic all its own.
Photo: iStock/Getty Images
Last week, the director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, released a plan for housing-finance reform. The director is an Obama administration holdover, and it shows. His plan’s principal element is heightened government regulation, with all the elements that caused the 2008 financial crisis.
According to the plan, circulated in Washington but not formally released by the FHFA, Fannie and Freddie would be turned into privately owned utilities, with regulated rates that would assure a “fair return” to their shareholders. They would issue mortgage-backed securities covered by an explicit government guarantee. This would “attract and retain shareholders while also supporting broad liquidity in the single family and multifamily housing finance market with affordable mortgage rates.” The whole scenario comes straight out of the left’s fantasy world.
The FHFA also expressed concern that too much competition “could increase the potential for a race to the bottom in underwriting standards in pursuit of market share.” Its solution is again regulating the rate of return of the Fannie and Freddie successors, “which would limit incentives to unduly relax underwriting standards.” Ideas like this hark back to the New Deal. The Roosevelt administration sought to prevent supposedly excessive competition on the theory that it would drive down prices, force companies out of business, and produce more unemployment.
Addressing another major Democratic priority, the FHFA’s plan called for government-backed affordable housing. The utility-like successors to Fannie and Freddie could have “a lower rate of return on purchases serving low-income and moderate-income borrowers.” This would ensure that “all taxpayers can share in the benefits of federal support for the housing finance market.” Remember that what taxpayers actually “shared” in 2008 was Fannie and Freddie’s losses of about $186 billion.
What caused those losses? Affordable-housing goals. A 1992 law required Fannie and Freddie to reduce their underwriting standards so they could meet quotas for low- and moderate-income mortgages. By 2008, on the eve of the financial crisis, half of all mortgages in the U.S. were subprime or otherwise risky. And 76% of those mortgages were on the books of government agencies, primarily Fannie and Freddie. The government had created the demand for these mortgages.
Treasury apparently has no problem with this. Last week Craig Phillips, counselor to Secretary Steven Mnuchin, said the department was “broadly supportive” of the FHFA’s plan. This is disturbing enough, but Treasury is also endorsing some of the details that are far afield of the administration’s deregulatory efforts. For example, last week American Banker quoted Mr. Phillips agreeing that the FHFA should use rate regulation to prevent a competitive race to the bottom: “The key is regulation. Whether there is one or five [guarantors], we cannot have weak regulation.” FDR must be smiling.
The trouble here is not merely that the Treasury is an outlier in what was supposed to be a deregulatory administration. It is also that the department’s current custodians appear to have learned nothing from the financial crisis, which was caused by precisely the policies they now support.
Before the affordable-housing goals were enacted in 1992, Fannie and Freddie would buy only prime mortgages. Although they competed with each other, there was no race to the bottom. They began to reduce their underwriting standards, with tragic effect, after the affordable-housing goals came into force. The result was the largest housing bubble in American history, followed by a monumental crash in 2008. Another consequence, courtesy of Barney Frank, was the Dodd-Frank Act, which was based on the false idea that the crisis was caused by insufficient regulation of the financial system. President Trump has accurately called the act a “disaster.” It over-regulated the rest of the financial system but left the insolvent Fannie and Freddie untouched, in the care of the FHFA as conservator.
Housing finance desperately needs reform, but Treasury is moving in the wrong direction—back to the 1930s. The headline on the American Banker story was “Treasury, FHFA see eye to eye on housing reform, top official says.” Who would have believed it a year ago?
Mr. Wallison is a senior fellow at the American Enterprise Institute. His most recent book is “Hidden In Plain Sight: What Caused the World’s Worst Financial Crisis and Why It Could Happen Again” (Encounter, 2015).
A Rogue Treasury Department Turns Toward the 1930s
The president shouldn’t allow an Obama appointee to guide housing finance policy toward disaster.
Peter J. Wallison
Jan. 23, 2018 7:40 p.m. ET
First, the good news: A group of senators are working on a bill to repeal the government charters of Fannie Mae and Freddie Mac , according to a report last week in the trade publication American Banker. This would set the U.S. on a course toward a private system for financing mortgages. Now, the bad news: The Treasury Department wants to return to the regulated market that caused the financial crisis.
At first this might seem implausible. The aggressive deregulatory work of the Trump administration has stimulated the U.S. economy, but its Treasury Department is pushing for more extensive regulation of the housing-finance market. Among conservatives, there’s an emerging view that the Treasury Department is on a frolic all its own.
Photo: iStock/Getty Images
Last week, the director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, released a plan for housing-finance reform. The director is an Obama administration holdover, and it shows. His plan’s principal element is heightened government regulation, with all the elements that caused the 2008 financial crisis.
According to the plan, circulated in Washington but not formally released by the FHFA, Fannie and Freddie would be turned into privately owned utilities, with regulated rates that would assure a “fair return” to their shareholders. They would issue mortgage-backed securities covered by an explicit government guarantee. This would “attract and retain shareholders while also supporting broad liquidity in the single family and multifamily housing finance market with affordable mortgage rates.” The whole scenario comes straight out of the left’s fantasy world.
The FHFA also expressed concern that too much competition “could increase the potential for a race to the bottom in underwriting standards in pursuit of market share.” Its solution is again regulating the rate of return of the Fannie and Freddie successors, “which would limit incentives to unduly relax underwriting standards.” Ideas like this hark back to the New Deal. The Roosevelt administration sought to prevent supposedly excessive competition on the theory that it would drive down prices, force companies out of business, and produce more unemployment.
Addressing another major Democratic priority, the FHFA’s plan called for government-backed affordable housing. The utility-like successors to Fannie and Freddie could have “a lower rate of return on purchases serving low-income and moderate-income borrowers.” This would ensure that “all taxpayers can share in the benefits of federal support for the housing finance market.” Remember that what taxpayers actually “shared” in 2008 was Fannie and Freddie’s losses of about $186 billion.
What caused those losses? Affordable-housing goals. A 1992 law required Fannie and Freddie to reduce their underwriting standards so they could meet quotas for low- and moderate-income mortgages. By 2008, on the eve of the financial crisis, half of all mortgages in the U.S. were subprime or otherwise risky. And 76% of those mortgages were on the books of government agencies, primarily Fannie and Freddie. The government had created the demand for these mortgages.
Treasury apparently has no problem with this. Last week Craig Phillips, counselor to Secretary Steven Mnuchin, said the department was “broadly supportive” of the FHFA’s plan. This is disturbing enough, but Treasury is also endorsing some of the details that are far afield of the administration’s deregulatory efforts. For example, last week American Banker quoted Mr. Phillips agreeing that the FHFA should use rate regulation to prevent a competitive race to the bottom: “The key is regulation. Whether there is one or five [guarantors], we cannot have weak regulation.” FDR must be smiling.
The trouble here is not merely that the Treasury is an outlier in what was supposed to be a deregulatory administration. It is also that the department’s current custodians appear to have learned nothing from the financial crisis, which was caused by precisely the policies they now support.
Before the affordable-housing goals were enacted in 1992, Fannie and Freddie would buy only prime mortgages. Although they competed with each other, there was no race to the bottom. They began to reduce their underwriting standards, with tragic effect, after the affordable-housing goals came into force. The result was the largest housing bubble in American history, followed by a monumental crash in 2008. Another consequence, courtesy of Barney Frank, was the Dodd-Frank Act, which was based on the false idea that the crisis was caused by insufficient regulation of the financial system. President Trump has accurately called the act a “disaster.” It over-regulated the rest of the financial system but left the insolvent Fannie and Freddie untouched, in the care of the FHFA as conservator.
Housing finance desperately needs reform, but Treasury is moving in the wrong direction—back to the 1930s. The headline on the American Banker story was “Treasury, FHFA see eye to eye on housing reform, top official says.” Who would have believed it a year ago?
Mr. Wallison is a senior fellow at the American Enterprise Institute. His most recent book is “Hidden In Plain Sight: What Caused the World’s Worst Financial Crisis and Why It Could Happen Again” (Encounter, 2015).
