By New York Times reporter Gretchen Morgenson
Seven years after their dubious lending practices helped push the United States economy to the brink of disaster, the nation’s largest banks are closing in on a long-sought goal: to unseat Fannie Mae and Freddie Mac, the mortgage finance giants, and capture their share of the profits in the country’s $5.7 trillion home loan market.
Taking place largely behind the scenes, the movement to take over the mortgage market has been propelled in part by a revolving door between Washington and Wall Street, an investigation by The New York Times has found.
While the big banks’ effort to enshrine their vision into law has failed so far, plans to replace Fannie and Freddie — which have long supported the housing market by playing a unique role as so-called government-sponsored enterprises, or G.S.E.s — are still very much alive. The Obama administration has largely embraced the idea, and government regulators are being pushed to put crucial elements into effect.
The charge began under Michael D. Berman, who has served not only as chairman of the Mortgage Bankers Association, one of the industry’s most influential lobbying organizations, but also as a senior adviser to Shaun Donovan, who was the secretary of Housing and Urban Development from 2009 to 2014.
Conversely, Mr. Berman recruited David H. Stevens — who was one of the lead architects of the Obama administration’s proposal to phase out Fannie and Freddie — to the mortgage bankers group, where Mr. Stevens is now president and chief executive.
Many in Congress believe Fannie and Freddie contributed to the collapse of the housing bubble, and they still rest on a shaky financial foundation, largely because of actions taken by the Treasury and the companies’ regulator.
For all the problems associated with Fannie and Freddie, some housing experts say, allowing the nation’s largest banks to assume greater control of the mortgage market would most likely increase costs for borrowers. It would also reduce participation and competition from smaller lenders, and could imperil taxpayers because of the potential for even greater bailouts for financial institutions that Washington considers too important to be allowed to fail.
Elise J. Bean is among those who are troubled by the quiet advances Wall Street is making toward Fannie and Freddie’s turf. A former chief counsel for the Senate Permanent Subcommittee on Investigations, Ms. Bean oversaw a bipartisan investigation into the causes of the financial crisis, playing a central role in the committee’s four hearings and helping produce a revealing 650-page report.
“Fannie and Freddie have their flaws, but that doesn’t mean the answer is to hand over their business to the banks,” Ms. Bean said. “Their role in the mortgage market is too important to put under the thumb of banks with a history of toxic mortgages, structured finance abuse and consumer maltreatment.”
Behind the Bailout
Decades ago, Fannie Mae and Freddie Mac were created by the government to provide prospective home buyers with financing in both good times and bad. Fannie was born in 1938 during the Depression, when bank lending dried up. The company didn’t make mortgage loans outright; it bought them from other entities. Later, it pooled loans in securities that it sold to investors.
If credit was scarce, the thinking went, banks would be more inclined to lend knowing they could sell a loan to Fannie or to Freddie, a competitor company created in 1970. A bank could then turn around and make another loan, earning fees while keeping the housing finance wheels spinning.
In addition to benefiting borrowers, this system enabled small community lenders to sell their loans to Fannie and Freddie as easily as even the biggest guns in banking. This gave borrowers a choice of lenders, encouraging competition and keeping costs down.
Although government creations, Fannie and Freddie also had public shareholders. Fannie sold shares for the first time in 1968 and Freddie followed suit two decades later. As the nation’s economy grew and homeownership expanded, Fannie and Freddie became increasingly powerful and profitable institutions.
The unusual hybrid of shareholder-owned companies carrying the government’s imprimatur worked well for a long time. But the combination turned sour in the 1990s when Fannie executives began using the company’s lush profits to finance lobbying efforts that enhanced their stature and independence in Washington.
Throughout these years, Fannie and Freddie’s mounting profits, generated in part by their special ties to the government, which put them at a financial advantage, also drew resentment from the nation’s largest banks.
Fannie’s success wound up being a double-edged sword. Its enfeebled overseer, the Office of Federal Housing Enterprise Oversight, allowed its enormous operations to rest on the tiniest sliver of capital, increasing profits during the fat years. But when the financial crisis hit, expected loan losses at both Fannie and Freddie overwhelmed the small amount of capital the companies had on hand.
About a week before Lehman Brothers collapsed in September 2008, the government stepped in. It put Fannie and Freddie into conservatorship under the Federal Housing Finance Agency, a new and stronger regulator created that summer in the Housing and Economic Recovery Act. The companies ultimately drew about $187.5 billion from taxpayers in the bailout. They were put on a tight leash by their government minders and were viewed as political poison by Democrats and Republicans alike.
In an interview on CNBC on Sept. 8, 2008, Henry M. Paulson, the Treasury secretary, talked about the government’s rescue of Fannie and Freddie as a steppingstone to a new housing finance system. “Heaven help us and our nation if we don’t figure out what the right structure is going forward,” he said.
The ink was barely dry on the Fannie and Freddie bailout when the Mortgage Bankers Association got busy. Mr. Berman, then vice chairman of the lobbying group and founder of CWCapital, a commercial real estate lender and management firm specializing in multifamily housing projects, was tapped to organize a campaign to privatize the nation’s broken home mortgage system.
With the housing market in collapse and Fannie and Freddie weakened and reviled, it was the perfect time to push the mortgage bankers’ plan to take over the companies’ business and divide their prized assets.
But with banks’ popularity plummeting after the financial crisis, their proposal had to be carefully framed as a way to protect taxpayers from future bailouts.
When President Obama entered office in 2009, taking Fannie Mae and Freddie Mac off government life support was far down his administration’s to-do list. But when officials began turning their attention to the matter in 2010, the industry-sponsored coalition was ready.
Its answer was to create new mortgage guarantors, backed by private capital, to take the place of Fannie and Freddie. These entities would issue mortgage securities with government guarantees, a report issued by the 22-member Council on Ensuring Mortgage Liquidity in late summer 2009 proposed.
The council, overseen by Mr. Berman, was made up of mostly large banks and mortgage insurers. It also recommended that assets belonging to Fannie and Freddie “be used as a foundation” by the new entities.
Chief among these assets were the mortgage underwriting systems the government-sponsored enterprises had built to bundle loans into securities to be sold to investors.
“The M.B.A.’s position literally was: Get rid of Fannie and Freddie and create these new entities,” Mr. Berman said in a recent interview. “But there were extraordinary amounts of value in the enterprises to be reused in different ways in the new system.”
At first, the industry’s views gained little traction. The economy was in tatters, and lawmakers were not yet ready to tackle the nation’s enormous and complex housing finance system.
Besides, Fannie and Freddie were providing virtually the only access American borrowers had to mortgages during this period. Yes, they were still drawing money from taxpayers, but at least the companies were financing loans as they always had, while big banks were withdrawing from the market.
Throughout 2009 and 2010, Mr. Berman and his colleagues pitched the mortgage bankers’ ideas, saying that their plan would prevent the need for future bailouts and keep the home loan spigot open.
To access the remaining article please go here.