February 3, 2015 2:26 PM
Ed Pinto had a depressing and revealing op-ed in The Wall Street Journal Friday about how the Obama administration is artificially creating markets for risky mortgages, using the Federal Housing Finance Agency and the government-controlled mortgage giants, Fannie Mae and Freddie Mac. Not only will this put taxpayers at risk, but it will burden prudent homebuyers through “cross-subsidies” for risky borrowers “subsidized by less-risky loans.”
Long ago, Pinto worked as an executive and credit manager at Fannie Mae before it began buying up massive amounts of risky mortgages to pursue short-run profits and meet federal affordable-housing mandates.
As Pinto notes in “Building Toward Another Mortgage Meltdown,” Federal Housing Finance Agency Director Mel Watt has pushed for a resurgence in risky mortgage loans, and hinted at more mischief to come in his January 27 testimony to the House Financial Services Committee, in which he “told the committee” that he expects to release by “March new guidance on the ‘guarantee fee’ charged by Fannie Mae and Freddie Mac to cover the credit risk” on the loans they acquire.
As Pinto points out,
In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them. Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’
Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives . . . homeowners and taxpayers will once again pay dearly.
Even progressive media like the Village Voice have reported on how the Department of Housing & Urban Development—especially Clinton’s HUD Secretary Andrew Cuomo—spawned the mortgage crisis by pressuring lenders and the mortgage giants to promote affordable housing, helping “plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.” A 2011 book by The New York Times’ Gretchen Morgenson also chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”
But the Obama administration learned nothing from this, and has expanded this risky, “affordable-housing” push. Pinto notes, lowering mortgage-insurance premiums for risky borrowers is the centerpiece of a “new affordable-lending effort by the Obama administration,” which led to the “the latest salvo in a price war between two government mortgage giants to meet government mandates”:
Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. . . .
As Pinto notes,
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers. Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.“
In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.
January 30, 2015 3:31 PM
“Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in The New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street...” reads the home page of The Huffington Post under the picture of establishment pillar, Jamie Dimon, CEO of JP Morgan Chase.
Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.
At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.
And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.
In its lawsuit brought this month, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.
In an open letter to its customers that ran in full-page ads in The New York Times, Washington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.
To its credit, MetLife is rejecting not only the burdens of being designated a SIFI but also the benefits—benefits that seem to eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.
As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.
We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”
January 8, 2015 12:24 PM
“If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.
Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policy making.
Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau—a bureaucracy created by the Dodd-Frank to be unaccountable almost by design—implemented the law’s “qualified mortgage” (QM) provisions.
The QM provisions were so costly and complex that community banks and credit unions—as far away as one could get from the causes of financial crises—sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representative responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s desk.
Yet today, in a much-heralded speech on housing in Phoenix, President Obama is expected not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.
According to press reports, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.
Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received—according to a new Politico investigation—an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action. In the Politico expose of the FHA and other government credit program, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”
November 18, 2014 2:18 PM
As CEI brings suit before the D.C. Circuit Court of Appeals tomorrow challenging the constitutionality of unaccountable bureaucracies created by the Dodd-Frank “financial reform” law of 2010, it looks like we may have some high-profile company in litigation against Dodd-Frank’s Financial Stability Oversight Council (FSOC).
The FSOC is a secretive, unaccountable task force of financial bureaucrats of various agencies created to designate banks and other financial firms “systemically important,” or too-big-to-fail. In September, the FSOC preliminarily decreed insurer MetLife a “systemically important financial institution,” or SIFI.
As CEI argues in our legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.
But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status, nor the regulatory costs. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.”
Now, The Wall Street Journal reports that “MetLife Inc. doesn’t want to be tagged as “systemically important” and is preparing to possibly take the U.S. government to court to avoid it, people familiar with the matter said.” The insurance firm has hired Eugene Scalia, attorney with Gibson, Dunn & Crutcher, who has put forth successful suits against other provisions of Dodd-Frank.
September 17, 2014 8:17 AM
Congress hasn’t voted just yet on the Continuing Resolution that includes the Export-Import Bank’s reauthorization. But we already know that it will pass this week, and Ex-Im will get a new lease on life, probably through June. We’ll have this fight all over again next spring and summer. But the fight has already taught an important lesson: more agencies should have automatically expiring charters. Ending or reforming Ex-Im would never have been a possibility if its charter didn’t have an expiration date. I make that point in a piece in Investor’s Business Daily:
Institutions matter. The rules of the game have a lot to do with how people play it — imagine what basketball strategy would look like if the three-point shot was changed to five points, or how baseball strategy would change if hitters could strike out on a foul ball.
The rules an agency issues aren't the only ones that matter. Rules governing the agencies themselves are just as important. If more agencies had a built-in check such as an automatic sunset that forced a periodic congressional reauthorization vote, they would have an incentive to behave better and pursue their missions in a less burdensome way.
The fight over Ex-Im isn't over. Even with Ex-Im's temporary new lease on life, reformers will still have won an important victory in tamping down its excesses.
September 11, 2014 12:21 PM
A vote on the Continuing Resolution, which includes the controversial Export-Import Bank reauthorization was originally scheduled for today, but has been pushed back to next week. So the combat continues over how long the Ex-Im reauthorization will last, and what other conditions might included as part of the deal. In today’s Washington Times, National Association of Manufacturers President Jay Timmons and I have dueling op-eds, with Timmons favoring reauthorizing Ex-Im, and me wanting to end it. The Wall Street Journal also weighed in with an editorial this morning, sharing my skepticism of Ex-Im.
Timmons makes three points in his piece that deserve a response. First, he argues that Ex-Im fills in gaps in private financing:
Ex-Im Bank provides financing that is critical to fill gaps when private-sector financing for small and large manufacturers is not available.
If Ex-Im makes a profit, as Timmons argues it does, then surely private banks would welcome an opportunity to make money for themselves by lending to more exporting businesses and their customers. If Ex-Im loses money, as the Congressional Budget Office convincingly argues, then there is no financing gap to be filled, and Ex-Im is financing too many insolvent projects.
Second, Timmons commits the “but other governments do it, too” fallacy:
September 9, 2014 12:29 PM
It appears Congress will decide the Export-Import Bank’s short-term fate this week. There are several bills with different reauthorization terms, and Rep. Justin Amash and Sen. Mike Lee even have a bill that would shutter the bank altogether. None of the bills have made it out of the House Financial Services Committee, which is chaired by Rep. Jeb Hensarling, who opposes the bank. What will likely happen instead is that Ex-Im reauthorization will be included in a Continuing Resolution (CR), which Congress must pass by September 30 to avoid a government shutdown.
The current battle isn’t whether Ex-Im will be reauthorized, it is how long the reauthorization will last. There are two likely options. Ex-Im opponents would prefer a reauthorization through early 2015. Ex-Im opposition is bipartisan, but the GOP has been more vocal about it, and most political observers are expecting Republicans to gain seats this November. Depending on how the numbers play out, when the new Congress convenes in January, it might be possible for Congressional Republicans to either let Ex-Im’s charter expire, or pass a bill similar to Amash and Lee’s to actively kill the bank, even if they can’t get much Democratic support.
Ex-Im’s defenders would rather keep the shutdown card in their hand; Ex-Im opponents will not risk a shutdown over a program equivalent to less than one percent of the federal budget. That’s why they want Ex-Im’s reauthorization to be the same length of any Continuing Resolution that gets passed, however long that might be. Even though that would be a shorter-term reauthorization, they can continue to renew Ex-Im with each CR that must pass going forward, knowing that it will succeed.
September 3, 2014 5:23 PM
Congress comes back from its annual August recess next week. One of the top items on its agenda is deciding the Export-Import Bank’s fate. Ex-Im subsidizes financing for U.S. exporters and their foreign customers. As I outlined here, Ex-Im subsidizes certain businesses at others’ expense. It is a pro-business policy, when what the economy needs are pro-market policies. Ex-Im will also be forced to shut its doors unless Congress reauthorizes its charter by the end of September, making for a golden reform opportunity for corporate welfare opponents.
The merits of the issue are clear enough, but politics is getting in the way. A bill to reauthorizes Ex-Im’s charter would likely pass the Senate, but would have trouble getting through the House. This would ordinarily mean that Ex-Im opponents would succeed in shuttering the agency, since Ex-Im’s expiration is automatic without reauthorization. That means Ex-Im supporters will probably pursue other means, such as tucking Ex-Im’s reauthorization into a must-pass appropriations bill. Ex-Im opponents would have no choice but to swallow that poison pill, or risk another politically costly government shutdown.
August 12, 2014 12:12 PM
One of the weakest arguments against free trade is the "unilateral disarmament" fallacy--that a country should refuse to liberalize its trade policies until other countries liberalize theirs. If your opponent uses it, you almost automatically win the debate. The Export-Import Bank's defenders must be getting desperate, because they are now having to resort to the unilateral disarmament fallacy. Here's a letter I sent to the Cleveland Plain-Dealer setting the record straight:
Editor, Cleveland Plain-Dealer:
George Landrith’s argument that the U.S. should subsidize certain businesses because other countries subsidize some of their businesses is equivalent to saying the U.S. government should stop ripping off its citizens only when foreign governments stop ripping off their own citizens (“Why keep the Ex-Im Bank? Unilateral economic disarmament is as unsound as unilateral defensive disarmament,” August 10).
The Export-Import Bank’s special favors make U.S. businesses less competitive by rewarding political connections over customer service, and have led to 74 corruption allegations during the last five years. If other countries want such problems, fine. But the U.S. can, and should, do better by closing the Ex-Im Bank this fall, regardless of what other countries do.
Fellow, Competitive Enterprise Institute
Author of the study, “Ten Reasons to Abolish the Export-Import Bank.”
August 8, 2014 11:34 AM
Over at American Banker’s BankThink blog, I have a piece making the case for closing the Export-Import Bank, mostly on corruption grounds:
The Wall Street Journal reported on June 23 that four Ex-Im employees have been removed or suspended in recent months, "amid investigations into allegations of gifts and kickbacks."
Former Ex-Im employee Johnny Gutierrez allegedly accepted cash payments from an executive of a Florida-based construction equipment manufacturer that has received Ex-Im financing on multiple occasions. In a July 28 congressional hearing, Gutierrez chose to plead the Fifth Amendment rather than deny the allegations. The other cases involve two "allegations of improperly awarding contracts to help run the agency" and another employee who accepted gifts from an Ex-Im suitor.