Mortgages' Future Looks Too Much Like the Past
The New York Times
By: Gretchen Morgenson
March 23, 2013
IN a perfect world, policy makers, legislators and concerned Americans would have spent the last few years conducting an honest dialogue about two important issues: how to resolve Fannie Mae and Freddie Mac, the government-owned mortgage finance giants, and how to create a housing finance system that would serve borrowers without imperiling taxpayers.
But ours is an imperfect world, and discussions about these questions have taken place mostly behind closed doors in Washington. The rest of us Americans, who guarantee the mortgage market, have not been given much of a say.
This is a pity because the future of housing finance in this country seems to be coming down to two taxpayer-backed concepts. One is the status quo, with Fannie Mae and Freddie Mac continuing to back the vast majority of mortgages. The other is a newly conceived public guarantor with some of the same problems that got Fannie and Freddie into trouble.
Let's begin with the status quo. The taxpayer rescue of Fannie and Freddie in September 2008 has cost $137 billion so far. While this has been paid down from an initial $187.5 billion, taxpayers aren't likely to get their money back anytime soon. Last fall, the regulator charged with overseeing Fannie and Freddie estimated that the taxpayer bill for the companies could be $200 billion by the end of 2015.
Still, Washington has shown little interest in winding down Fannie and Freddie. The ostensible reason is that there would be no mortgage market without them; private lenders are still unwilling to make home loans that they want to hold as investments, so Fannie and Freddie still have to buy or guarantee them.
But doing nothing also serves other interests. Since 2011, any increase in the guarantee fees the companies receive when backing a mortgage goes to the Treasury, not to repay taxpayers. The companies, therefore, have become a government piggy bank.
There is another group that would prefer Fannie and Freddie to remain as is: the former executives who still receive benefits from the companies and the taxpayers who own them.
According to documents reviewed by The New York Times, $25.3 million in pension payments went to 1,785 former Fannie executives last year; an additional $12.7 million went to 871 former Freddie officials.
Had the companies not been rescued and instead filed for bankruptcy, the former executives' pensions would be the obligation of the Pension Benefit Guaranty Corporation, financed by corporations whose plans it backs. Instead, taxpayers have been on the hook for five years.
Among the retirees receiving pensions courtesy of the taxpayer are Franklin D. Raines, Fannie Mae's former chief executive; J. Timothy Howard, the company's former chief financial officer; and Leland C. Brendsel, former chief executive of Freddie Mac.
All three men were ousted from their companies amid accounting scandals -- Freddie's in 2003 and Fannie's a year later. All were paid handsomely through their tenures. Between 1998 and 2004, for example, Mr. Raines received $90 million in compensation, regulators found. Mr. Howard received $30 million over the period. When Mr. Brendsel left Freddie Mac, he was earning $1.2 million a year in salary.
Even so, Mr. Raines receives a pension of $2,639 from taxpayers each month, the documents show; Mr. Howard receives $4,395 and Mr. Brendsel $8,039. Requests for comment from the former executives' lawyers were not returned.
The documents show that taxpayers spent $11 million last year on medical costs for 1,392 Fannie and Freddie retirees. And from September 2008 through 2012, taxpayers also spent $114 million for legal bills racked up by former executives and directors testifying in lawsuits relating to the accounting scandals or financial crisis inquiries.
These payments are governed by contracts struck before Fannie and Freddie fell, so there is little that anyone can do to revoke them. But Representative Randy Neugebauer, a Texas Republican on the House Financial Services Committee, said they made him "nail-biting mad." He added: "Taxpayers have put all this money into these entities. The attorneys have gotten a lot richer and the executives that led these organizations before their demise are still getting big paychecks. It's very frustrating."
LET'S move on to the second option for housing finance that's gaining traction. It is outlined in "Housing America's Future: New Directions for National Policy," a report published last month by the Housing Commission of the Bipartisan Policy Center.
While the authors of the report contend that it was intended to set a new direction for federal housing policy, its reliance on a government backstop is awfully familiar.
The report calls for replacing Fannie and Freddie with a public utility to guarantee a vast number of home mortgages against default. The loan size to be covered is unspecified, but the commission suggests that it should be less than the current Fannie and Freddie loan limit of $417,000 in most markets.
Under the plan, the taxpayer-backed insurance would kick in only after private-sector participants had taken losses. For example, private mortgage insurers would have to hold enough capital to back loans even if home prices declined by 35 percent. And the guarantor's insurance fund would be made up of premiums collected from borrowers.
These details differ from the broken system that the commission aims to replace, but there are many similarities.
For example, the plan requires the government to be sophisticated at pricing the risk in the mortgages it will back. If it isn't, the premiums it receives will be insufficient to pay future loss claims.
This sophistication is not a given. Neither Fannie nor Freddie has been adept at setting an appropriate price for their guarantees -- that's why they're choking on more than $100 billion in losses. Why would a new public guarantor do the job any better?
The report also fails to address who will monitor the guarantor for fraud. That is a concern to Steve A. Linick, the inspector general at the Federal Housing Finance Agency, the conservator for Fannie and Freddie.
"Under the proposal, the significant role now played by Fannie and Freddie would be diffused through multiple private-sector entities," Mr. Linick said in an interview. "While this might make risk less concentrated, the challenge of managing risks across a number of parties will have to be addressed."
That the commission recommends a taxpayer-backed solution isn't surprising, given its makeup. Six of its 22 members and consultants either hail from Fannie or Freddie or work at institutions that received major financing from the companies before they collapsed.
Asked about that composition, a commission spokeswoman said that the diverse group of experts "were not selected solely on the basis of past affiliations."
Still, the Fannie and Freddie DNA in the commission raises questions about whether it seriously considered any outcome that excluded a government backstop. I asked Nicolas P. Retsinas, a member of the commission who is a senior lecturer at the Harvard Business School, about the risk to taxpayers. A fair concern, Mr. Retsinas said, adding: "The commission believes in the continued importance of homeownership and there had to be some role for the government to preserve that option for middle-income families."
Wealthy families will also benefit from the guarantor. And the taxpayer, under both the commission's plan and the status quo will be left with a more significant role than many may have in mind.
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