You Call This GSE Reform?

*You Call This GSE Reform?*
**By Phil Hall**

new-PhilH***Only in Washington can out-of-control government spending and rampant bureaucracy be replaced with more government spending and expanded bureaucracy. Case in point: the new government-sponsored enterprise (GSE) reform bill that is being hammered out by a bipartisan team of well-intended senators.

****The good news in this bill, as reported by American Banker, is that it seeks the eventual closure of Fannie Mae and Freddie Mac in roughly eight years – and not a moment too soon! Lest we forget, the GSEs have been sponging up hundreds of billions in taxpayer funds since they were put in federal conservatorship in September 2008. Yes, the GSEs have recently begun to show evidence that they can generate profits – but, then again, what competition do they have?

****The bad news in the bill is that the senators’ bill wants to set up the mechanism to dole out hundreds of billions in bailout funds should this post-GSE era fall into a reprise of the 2008 catastrophe. Included here is the creation of a new agency called the Federal Mortgage Insurance Company (FMIC), which would step in with generous reinsurance support for catastrophic failures in the mortgage-backed securities (MBS) world. The FMIC is reportedly being designed to emulate the mission of the insurance fund operated by the Federal Deposit Insurance Corp., though at first glance it looks like a new version of the Troubled Asset Relief Program.

****The FMIC, according to the bill, would take over from the Federal Housing Finance Agency, which itself took over from the Office of Federal Housing Enterprise Oversight in 2008. But don’t think that Edward DeMarco will be able to carry his one-man shot to the FMIC – the draft bill being hammered out envisions a five-member commission running this new agency. Hmmm, how come the FMIC can have a five-member commission, but not the Consumer Financial Protection Bureau? But I digress.

****The FMIC is also going to call the shots when it comes to determining the standards that govern the secondary market. Whether these standards will override the current standards formulated by a myriad of existing agencies remains to be determined.

****The bill also envisions the debut of an entity called the Market Access Fund. Unlike the supposedly independent FMIC, this new entity will be placed inside the U.S. Department of Housing and Urban Development. Its focus will be the rental markets and the assistance of lower-income communities that somehow managed to miss being helped by the trillions of federal housing dollars allocated over the past several decades. That’s Congress for you: if at first you don’t succeed, keep on not succeeding.

****And there is yet another new federal operation in waiting with this bill: a hitherto unnamed entity that the FMIC will be able to create to help community banks and credit unions with their mortgage securitization functions. This, of course, is supposed to be what the GSEs are doing today, which makes one wonder what the hell is going on here.

****How much will all of this eventually cost? Well, the bill is still being drafted and the costs of this endeavor were conveniently left out of the leaked information surrounding the in-progress legislation. Needless to say, this will not be done on the cheap.

****If anything, this proposed scenario has achieved the impossible: it actually makes today’s dysfunctional federal housing finance system look like a model of precision and efficiency. If this is Congress’ idea of a cure, perhaps we should stick with the illness?