President Obama visited Phoenix yesterday to give a speech on homeownership. The promotion of homeownership has been on the agendas of the past several presidents (e.g., George W. Bush and the “ownership society) and much of President Obama’s speech could have been written by HUD secretaries Jack Kemp or Henry Cisneros. While there is little new in the President’s speech, two things were particularly noteworthy.
First, the administration appears committed to addressing Fannie and Freddie, the two government-sponsored enterprises (or GSEs) that played a central role in fueling the bubble. President Obama talked about “laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.” He continued:
That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.
Oddly enough, Dodd-Frank did little more than note that “the hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved” and stated that financial reforms “would be incomplete without enactment of meaningful structural reforms.” That task was put off for another day. Perhaps the day is nearing.
To put things in context, the GSEs had the implicit backing of the federal government, allowing them to attract capital at rates that were only slightly greater than those for Treasuries (the Congressional Budget Office’s estimates of the annual subsidy have ranged from $14 billion to $22 billion). They were also exempted from SEC registration fees, state and local income taxes and regulations and were allowed to function as highly leveraged institutions. Of course, there were efforts by Congress to privatize the GSEs in the early 1990s, but the GSEs proved quite skilled at building a bootlegger-Baptist coalition with affordable housing advocates and recycling some of the profits back into Congress (for those who are interested, I have an article entitled “Before the Third Act: Crony Capitalism and the Origins of the Financial Crisis” in the Georgetown Journal of Law & Public Policy that lays out some of the details). Bottom line: winding down the GSEs is vitally important.
The second noteworthy proposal involved simplification of mortgages. I know that many opposed the Consumer Financial Protection Bureau that was created under Dodd-Frank, largely a result of the effective advocacy of then Harvard law professor Elizabeth Warren. But Warren’s own research documents the extent to which the complexity and opacity of many mortgage instruments allowed financial institutions to direct people with good credit records into subprime vehicles under terms that proved disastrous. Information asymmetry is one of the causes of market failure. To the extent that the CFPB is successful (quoting Obama) in “laying down new rules of the road that every family can count on when they’re shopping for a mortgage,” it can facilitate market governance. Who can object? (Obviously much of the GOP in the Senate and the House)
The President opened his speech with a celebration of the housing recovery (“our housing market is healing. Home prices are rising at the fastest pace in 7 years. Sales are up nearly 50%. Construction is up nearly 75%. New foreclosures are down by nearly two-thirds.”). It will take some time to determine whether this is a genuine recovery or a new asset bubble driven by the easy money policy of the Fed. Regardless, some of the Obama proposals make genuine sense (others—and here you will have to read the speech for yourself—seem to be little more than a repackaging of past practices that enticed the most fragile to enter the housing market).