The Flying Penguin And GSE Reform

You take a penguin, pick it up, and say to it, “Now, penguin, I have a great idea – you are going to fly around the room and land on my shoulder. Let’s make it happen!” And you throw the penguin into the air and it falls to the ground.

You then pick up the penguin, brush it off, kiss it on the head and say, “Penguin, I don’t think you caught on to what I want. I would like you to fly around the room and then land on my shoulder. Now, please do that for me.” And you throw the penguin into the air and it falls to the ground.

With a little bit of irritation, you quickly pick up the penguin and say to it, “Penguin, I don’t think you are paying attention. You’re a bird, yes? Birds have wings and feathers and they fly, yes? Okay, Mr. Bird, how about twice around the room, then land on my shoulder.” And you throw the penguin into the air and it falls to the ground.

Now, with your blood pressure slowly beginning to rise, you violently yank the penguin and shake it. “Penguin, what the hell is wrong with you?” you demand in a somewhat volcanic voice. “You’re a bird. Birds fly. Now make with the flying.” And you throw the penguin into the air and it falls to the ground.

Eventually, as a result of this episode, either the penguin will become a mess of broken bones or you will succumb to a stress-related cardiac arrest, or both. Of course, the problem is not with the penguin – you can’t expect it to immediately reverse tens of thousands of years of evolution just to meet an impromptu whim. The problem here is with you – you’re not seeing things for what they are and you get upset (or worse) when things don’t go your way.

I am reminded of the flying penguin as a result of the lingering failed efforts to reform the government-sponsored enterprises (GSEs). At last week’s Secondary Market Conference in New York, Mortgage Bankers Association President and CEO David H. Stevens looked glumly at this debacle and rued the seemingly endless federal conservatorship for Fannie Mae and Freddie Mac.

“The tasks ahead are these: encourage liquidity, sustainability and competition in the secondary market; restore trust and confidence in the marketplace; and attract more private capital in order to reduce taxpayer support and government control,” Stevens said. “The status quo is not an option.”

As much as I hate to contradict Stevens, it appears that he is looking at Congress and the White House the same way that the person with the penguin is looking at the Antarctic bird – he is expecting results that cannot happen.

For starters, GSE reform has never been a priority for the White House. The Obama Administration tried to ignore the subject for most of its first term, even disconnecting the GSEs from the federal budget in a bit of sleazy accounting trickery designed to minimize the costs of keeping these entities in conservatorship. Indeed, the White House thought so little of the subject that it allowed an interim director to run the Federal Housing Finance Agency for four-and-a-half years, an unprecedented stretch of time for a regulatory agency to be run by someone that was supposed to be a temporary stopgap.

And while Stevens is eager to “attract more private capital in order to reduce taxpayer support and government control,” he seems to forget that he is dealing with the Obama Administration, which has done absolutely nothing to either shrink the size of the federal government or to encourage free enterprise without the shackles of regulatory overkill. Shuttering the GSEs or downsizing them to a much smaller presence in the housing finance system is utterly antithetical to everything that this administration embraces.

As for the other side of Pennsylvania Avenue, forget it. Even if any GSE legislation gets passed by the Senate, there is no chance that it will take root in the House of Representatives this year; relations between the leadership of the House and Senate are abominable and there has been no synergy at all on any major issue, let alone this.

The status quo is not an option – it is a reality, and one that will remain until there is a new power set-up in Washington.

In his speech last week, Stevens warned, “The economy and the housing market have stabilized for now, but the current secondary market structure clearly cannot sustain another economic slump. The housing market needs progress. It’s time we address the structural, regulatory and economic impediments that are limiting the return of private capital and have a stranglehold on housing recovery. It’s time to transition to a stable, competitive and accessible marketplace.”

Is this something that Stevens expects Congress or the Obama Administration to do? It is a wonderful idea – but just like the aforementioned penguin, it ain’t gonna fly!

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