It is at once ironic and depressing that most of the public policy interventions intended to boost home ownership have done nothing to boost home ownership despite costing our treasury trillions of dollars in foregone revenue and increasing risk in financial markets.
For instance, only relatively wealthy homeowners—who need little help to afford a home—benefit from the deductibility of mortgage interest and state and local taxes. The deductions are fully captured by existing homeowners via higher prices for the homes they own, and these days only the wealthiest 10 percent of the population are able to avail themselves of the deduction. Watching Democratic attempts to increase the deductibility limits while pretending that doing so constitutes anything other than a gift to their wealthiest constituents and donors has been immensely entertaining.
Similarly, few people think that Fannie Mae
FNMA
While their intervention in the mortgage market accomplishes little in terms of boosting home ownership, these agencies have the potential to wreak havoc on the economy if they are not held accountable, which we observed during the financial crisis in 2008-2009.
The two entities lost billions of dollars when mortgages they were holding turned out to be worthless, and the Treasury had to bail them out. For its troubles the Treasury took possession of nearly 80 percent of the company and declared a 10 percent annual dividend for itself, and the claims of the shareholders on the remaining twenty percent of the GSEs were made tenuous.
In the immediate aftermath of the Great Recession the two GSEs were losing money hand over fist as property prices across the U.S. continued to plummet, and millions of homeowners stopped paying their mortgages and walked away from their mortgages.
However, by 2012 the market had recovered, new homeowners were returning to the market, and the GSEs were making money hand over fist. But instead of using that money to recapitalize Fannie Mae and Freddie Mac to ensure their future stability, the White House declared an amendment to The Housing and Economic Recovery Act of 2008 (HERA) that called for all profits of both GSEs to be be swept into treasury coffers at the end of each quarter. The motivation, I suspect, was that the GSEs were taking in so much money that the sweep would allow the Obama Administration to report a significantly lower budget deficit going into the 2012 election and allow it to claim it was being fiscally prudent.
Mark Calabria had a firsthand view of all of these goings ons, and his book gives an interesting account of what occurred during these times. He was on the Senate Banking Committee when it wrote HERA, the law that gave the Treasury Secretary the ability to effectively take over the GSEs, and participated in the years-long negotiations that resulted in the passage of Dodd-Frank, which significantly changed the regulatory landscape for the financial sector.
A few years later he was appointed the Administrator of the Federal Housing Finance Agency, which HERA created to oversee Fannie Mae and Freddie Mac. Calabria’s appointment was heralded by many who saw Calabria as someone who would protect the non-Treasury shareholders of Fannie Mae and Freddie Mac by selling off Treasury’s share of the companies and returning it to private ownership.
But Calabria—like most people who cut their teeth working for Congress—had no appetite for using regulatory fiat to play fast and loose with what Congress intended, which is what Fannie Mae and Freddie Mac shareholders . His reading of HERA—and what I think is the correct one—is that the job of FHFA is to protect the GSEs and prevent another 2008, and the best way for him to accomplish such a thing was to recapitalize the GSEs.
The sweep was effectively altered to allow Fannie and Freddie to begin to accumulate capital to serve as a reserve. Calabria’s fear was that without a capital buffer, the two would need an infusion from the Treasury the next time that property prices declined, and this would trigger a barrage of recriminations from Congress and others upset that taxpayers were on the hook and possibly upset the broader capital markets, which might see it as a portent for another crisis and inadvertently cause one.
The timing of the recapitalization proved extremely fortuitous, as Calabria’s reforms—both the capital infusion as well as a variety of other changes that allowed the GSEs to be more nimble— helped stave off what could have been a financial crisis when millions of renters stopped paying rent during Covid and many landlords needed forbearance on their mortgages.
Today, the GSEs continue to build up capital and Calabria’s departure as Administrator—which occurred after the Supreme Court ruled in mid 2021 that the administrator serves at the pleasure of the president—has not changed that, to the surprise of not a few people.
In the world of conservative economic wonkery there are some who consider Calabria’s refusal to sell off Treasury’s share of the GSEs to be apostasy, and the investors who still hold shares in Fannie or Freddie remain resentful he didn’t come to their rescue.
He is aware of this perception and to some degree the book addresses why he felt he couldn’t do such a thing. Left unsaid—but implied—is the fact that other bureaucrats do indeed ignore the intent of Congress or the White House and pursue their own regulatory agenda, all but daring one or the other to intervene.
I think restraint has proven to be the correct—and proper, from a limited government perspective—approach to take. Congress may be a dysfunctional mess, but it has shown it has the ability to fix egregious problems. Usually when it has no other option. Calabria heeded the will of Congress and strived to be a good bureaucrat, and his success at accomplishing such a thing was fortuitous for financial markets.
Source: https://www.forbes.com/sites/ikebrannon/2023/04/30/shelter-from-a-storm-protecting-the-housing-market-from-itself/