Housing System Worse Than Before Great Recession, Officials Say

Trump administration officials are defending their plan to end government control of mortgage finance giants Fannie Mae and Freddie Mac. Speaking on September 10, officials characterized today’s housing finance system as worse than it was on the cusp of the Great Recession in 2008.

Republican lawmakers, who are focused on what they see as growing risk in the system, clashed with Democratic senators on whether the change would raise home borrowing costs and freeze out lower-income buyers. Fannie Mae and Freddie Mac stand behind half the country’s mortgages and were among the biggest enterprises bailed out during the financial crisis a decade ago. Government officials say the companies are dangerously undercapitalized and that lending standards have deteriorated since the housing crash.

“This whole thing is a car wreck. It’s a dumpster fire,” said Republican Senator John Kennedy at a Senate Banking Committee hearing. “We spent $190 billion of taxpayer money, and we’re in worse shape.”

The comment kicked off a highly contentious partisan debate over plans by the Treasury Department and HUD to scale back the federal government’s role in the mortgage market. The plan would see an overhaul of Fannie and Freddie and the building of the companies’ capital to enable them to face an economic downturn before being released from government control.

As of now, these companies are allowed to retain only a combined $6 billion in capital despite owning or guaranteeing more than $5.5 trillion of mortgages.

“I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,” Federal Housing Finance Agency director Mark Calabria told the committee. “If we do nothing, this is going to end very badly.”

Senate Banking chairman Mike Crapo said Fannie and Freddie are less equipped for a downturn than they were before the 2008 crisis. Then, the companies held 45 cents in capital for every $100 in mortgages, he said, while today they only hold 19 cents.

When Democratic Senator Mark Warner pressed Calabria and Treasury Secretary Steven T. Munchin on whether the uber regulator FSOC should subject these companies to greater oversight, they rejected the idea.

“Before we raised public capital, we would make sure we understood that there was enough capital so that they did not need to be designated ‘systemically important’ by FSOC,” said Munchin.

“It appears to me from your administrative proposals, we could end up with a system that actually doesn’t end too-big-to-fail and doesn’t increase affordable access to credit — that is a grave concern to me,” Warner said. “The administration’s plan is going to put us right back to where we were prior to 2008.”

Munchin and Calabria disputed this characterization, emphasizing that the plan includes reforms to reduce risk in the companies’ portfolios. The administration promised that the plan will preserve home buyers’ access to 30-year fixed-rate mortgages, which are the pillar of housing finance.

“That support, however, should be explicitly defined, tailored, and paid for.” said Munchin, who acknowledged that some level of government support would be needed if prices for 30-year mortgages are to remain close to current market levels.

The Trump administration initially looked to Congress for legislation to overhaul the housing finance system and return the companies to private shareholders, but since Congress hasn’t acted, the administration will take administrative action for the core change, ending the Fannie and Freddie conservatorships. The timeline has not been disclosed.