Housing Reform and Taxpayer Protection Act does neither

Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) are co-sponsors of  S.1217, the Housing Reform and Taxpayer Protection Act of 2013 -- a bill that achieves none of its stated objectives.  It isn’t reform and it doesn’t protect taxpayers.  On Wednesday, Dec. 4, I will be joining a panel on Capitol Hill hosted by the Federalist Society to examine “The Rule of Law, Property Rights, Bankruptcy and GSE Reform.” 

The panel will focus on the recent past and uncertain future of Fannie Mae and Freddie Mac, the two massive government enterprises currently in conservatorship, which are the object of “reform” by the administration and Congress.

ADVERTISEMENT
During the housing bubble, Fannie and Freddie raked in enormous profits  by purchasing and insuring billions of dollars of mortgage loans. But when the housing market turned down, the taxpayers got stuck holding the bag.  “Never again! ” the administration claimed. 

So, Corker and Warner delivered the Housing Reform and Taxpayer Protection Act of 2013. It shuts down Fannie Mae and Freddie Mac, the two giant mortgage insurance companies, and replaces them with one enormous government insurance company, the Federal Mortgage Insurance Corporation (FMIC).

We have very little information about the proposed insurance company or how it would be regulated. This is called jumping from the frying pan into the fire. At least we knew Fannie, Freddie and their regulator the Federal Housing Finance Agency.

One of the factors contributing to Fannie and Freddie's meltdown were affordable housing goals placed on them by Congress. This resulted in Fannie and Freddie purchasing 39 percent of their mortgages from underserved areas (an affordable housing goal) in 2008. Twenty-seven percent  of mortgage purchases were “special affordable” and 56 percent were to low-and-moderate income households. Corker-Warner eliminates Fannie Mae and Freddie Mac as well as the affordable housing goals. However, the bill replaces Fannie and Freddie with the newly minted FMIC and gives the FMIC a vague set of “duties” instead of explicit goals.

So, affordable housing goals are gone, but vague duties are in their place. And housing goals have been replaced with “duty to serve.” Potentially, this situation could be worse than well-defined housing goals since everything is now subject to lobbying for a “better deal.”  Corker-Warner requires that private investors take no less than 10 percent of the first loss on the mortgage-backed securities, which are issued by firms specially registered with the FMIC.  Investors take the first losses, with the insurance fund picking up the rest. Already, there is lobbying to weaken that 10 percent down to 5 percent for fear that it will stall the housing recovery or differentially impact some borrowers negatively.

But the unanswered question is what happens to current stockholders (common and junior preferred) and bondholders. Will this be another General Motors bankruptcy-type transfer where investors are denuded of their property rights (much like how the Obama administration paid GM bondholders pennies on the dollar to save GM and union jobs)? Treasury just announced that they are selling the remainder of GM stock for what is likely to be a $10 billion loss to taxpayers.

We have to be certain that Corker-Warner protects the rights of existing investors, unlike the administration’s GM fiasco for bondholders.

From the taxpayer perspective, Corker-Warner has still not articulated how it will protect taxpayers since the 10 percent rule is on shaky legs. Affordable housing advocates, realtors, homebuilders and various government cronies want more flexible rules to aid their constituents at the expense of taxpayers.

Corker-Warner really needs to create transparency about what will happen to current bondholders and stockholders if the transition proceeds. Protecting private property rights is very important in the USA;  and as of now, I don’t see these protections in Corker-Warner.  Just “olly olly oxen free” for government cronies.  And a pocket full of posies for taxpayers.

Ashes, ashes, taxpayers and investors will all fall down. Again.

Sanders is distinguished professor of real estate finance at George Mason University's School of Management and creator of Confounded Interest, which offers online commentary on regulatory policy and the home finance industry.