Mortgage broker oversight: The REAL bridge to nowhere
By Jennifer J. Foster
Tommy Stevenson noted in the Tuscaloosa News’ Politibits yesterday that since leaving the meeting of congressional leaders huddled at the White House on Thursday, U.S. Sen. Richard Shelby of Alabama was “conspicuously absent” from negotiations on the bailout plan over the weekend.
True to his no-nonsense style, Shelby didn’t mince words:
Some lawmakers have made clear that they will not vote for the bailout plan under virtually any terms.
“I didn’t want to be in the negotiations because I object to the basic principles of this,” said Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, who would normally be his party’s point man.
Pressed about his role, Mr. Shelby replied, “My position is No.”
Shelby’s absence was problematic for congressional Republicans trying to work out a deal that would pave the way for member of their caucus to support the bailout. As the ranking member of the Senate’s Committee on Banking, Housing, and Urban Affairs, Shelby’s support for the bill sure would make things a lot easier on Treasury Secretary Henry Paulson, but his opposition to the plan might well prove fatal to the plan.
As we know now, Republican congressional leaders might have done well to worry less about the Senate and more about their own members, since Republicans opposed the bill 65-133-1 (U.S. Rep. Jerry Weller of Illinois was the lone member not voting; apparently, no one can find him. Good thing he’s not running for re-election).
But it’s likely the bill will reappear later this week in a different form. House members will meet on Thursday at noon Eastern time to tackle this issue again. And when the House does finally pass the it’s-not-really-a-bailout bill, Richard Shelby will still be the ranking member of the operative committee in the Senate that will have to pass it, and the odds are that he will still be opposed.
But don’t call Shelby a stick-in-the-mud who’s stubbornly clinging to principle. He’s arguably done more than anyone to try to keep the train on the tracks. He’s worked on this issue more than five years ago, to no avail. He’s seen his regulatory fixes go up in legislative smoke. So when and if Shelby puts up the ‘no’ vote, it will be with a clear conscience.
Someone sent me a link to a New York Times article from back in 2003 when the Bush Administration “recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”
You can read the story for all the details, but it comes down to this: Republicans, led by Shelby, wanted more regulation of the mortgage industry and the creation of a new Treasury Department agency that would have the authority, among other things, to determine whether Fannie Mae and Freddie Mac were “adequately managing the risks of their ballooning portfolios;” Democrats opposed the move on the grounds that “tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing,” according to the Times.
Furthermore, the Times reported that Shelby and his then-House counterpart, U.S. Rep. Mike Oxley, “announced their intention to draft legislation based on the administration’s proposal:”
‘'The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,‘’ Mr. Oxley said at the hearing. ‘'We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,‘’ the independent agency that now regulates the companies.
I e-mailed Shelby’s office today to see what became of that planned legislation. Assistant communications director Jonathan Graffeo responded that the intended legislation was drafted – twice.
Shelby held “numerous hearings on reforming the regulation of Fannie May, Freddie Mac and the Federal Home Loan Banks” during his tenure as chairman of the Senate Banking Committee from 2003 to 2006, Graffeo wrote, and under his chairmanship, the committee twice passed legislation to the point.
“Both of these proposals passed on party-line votes,” with Republicans voting yes and Democrats voting no, Graffeo wrote; “Democrats would not allow the bills to get to the Senate floor.”
Why?
Graffeo pointed to the quote in the 2003 Times article from U.S. Rep. Barney Frank, who now chairs the House Financial Services Committee (and who, incidentally, ever-so-helpfully played the role of court jester this afternoon after the bailout went down in flames). Frank’s quote “is a good example of Democrats’ thoughts on the issue at the time (and for a long time thereafter),” Graffeo wrote.
Here’s the quote – and remember, it’s from 2003:
‘'These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,‘’ said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ‘'The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.‘’
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
‘'I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,‘’ Mr. Watt said.
Republicans wanted more oversight. Democrats wanted more affordable housing.
Both laudable goals. Both equally important.
But lawmakers’ inability to find a way to make them coexist has cost this country immeasurably: In just six hours today alone, the New York Stock Exchange dropped $1.2 trillion in value.
In just six hours today alone.
For more on the Shelby fix, visit the Banking Committee’s web site; click on “Schedule” under “Hearing Schedule,” then peruse the list of available hearings by topic. You will see that the markup of the first bill on April 1, 2004, was preceded by no fewer than nine hearings (Sept. 3, 9 and 23 and Oct. 15, 16 and 23 of 2003 and Feb. 10, 24 and 25 of 2004), while the markup of the July 28, 2005, bill was preceded by no fewer than seven (Feb. 10, April 6, 7, 13, 19, 20 and 21 of 2005).
Of particular note is the testimony of Richard F. Syron, who was chairman and CEO of Freddie Mac when he appeared before the committee on April 20, 2005. For some reason, the meeting information is not directly available from the web site, but it is available in Google cache; Syron’s testimony is found here. Here’s an excerpt:
There are a lot of stakeholders in the current debate. If we get it wrong, consumers will pay higher mortgage rates, and lenders may have trouble finding buyers for their mortgages in lean times. But there are other key players we cannot ignore: the people who invest in U.S. housing via the GSEs in hopes of earning a return. The capital provided by these private equity and debt investors serves as a critical first line of defense for the GSEs and the government. Without them, the whole system breaks down.
Let’s first talk about our shareholders. In creating the GSEs, Congress decided it did not want the government to be the first line of defense for the risks of the secondary mortgage market – so it created private-sector corporations that would be owned by independent shareholders. We shouldn’t forget that it’s their money – in the case of Freddie Mac, $31 billion of shareholder wealth – that is first on the hook should we fail to manage our risks properly. Their investment also enables us to play a stabilizing force in the economy. In the wake of the Asian debt crisis in 1998, Freddie Mac was able to raise over $2 billion in equity capital to support the U.S. housing market.
As with any corporation, our shareholders expect – and deserve – to be paid for the use of their capital. Many of our shareholders are average Americans. Roughly 43 percent of our stock is held in pension funds and mutual funds, whose primary investors include individuals, retirement funds and college tuition savings plans. That’s a lot of nest eggs.
Our debt investors play a similarly critical role in making the system work. By investing in GSE debt, they enable us to purchase more mortgages from lenders, which replenishes funds available for housing. Our debt investors are the second line of defense for the U.S. housing finance system. At the end of 2004, they were providing over $733 billion to Freddie Mac.
At this juncture, regulatory reform is needed to maintain public trust, but overregulation could do more harm than good. Every day, the GSEs make possible an interdependent web of transactions among investors, lenders and consumers. Pulling hard on the threads of this finely woven system is possible to a point. However, the system is not infinitely elastic. No one knows for sure how far we can push the GSE model of housing finance before the providers of our debt and equity capital decide to take their money elsewhere. Thus, we want to work with you to ensure that whatever bill results from this Committee’s efforts collectively retains the key elements of the model that has been so beneficial to America s families.
There you have it.
