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Letter of Opposition: Campbell-Peters, Housing Finance Reform Act of 2011, H.R. 1859

June 07, 2011 J

Dear Representatives Campbell and Peters,

As you know, the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac are continuing to bleed taxpayer money at an alarming rate. Treasury has already provided $154 billion to prop up the failed mortgage-finance giants. With the companies facing continued heavy losses on their mortgage investments, their regulator estimates they will need up to $200 billion more through 2013. As the price tag for the GSE bailout continues to balloon, we can all agree that that the GSEs need to be wound down as quickly and responsibly as possible. But the plan for what will replace them is vitally important – we need to get it right if we want to avoid future crises.

On behalf of 1.7 million Americans for Prosperity activists in all 50 states, I write to strongly oppose the plan you have offered to fill the void as Fannie and Freddie are gradually eliminated. The so-called Housing Finance Reform Act of 2011, H.R. 1859, merely replaces one form of disastrous government support for the mortgage market with another, and does nothing to solve the problems that contributed so heavily to the recent financial crisis and the complete debacle of the Fannie Mae and Freddie Mac bailouts.

H.R. 1859 would gradually wind down Fannie Mae and Freddie Mac, ending in sale of their assets through receivership after a number of years. In their place, the bill calls for the creation of tightly-regulated private mortgage “guarantee associations” that will issue new mortgage backed securities, backed only by mortgages that meet strict underwriting standards. The government’s role comes in with an explicit federal guarantee of the securities issued by the associations: in exchange for a fee the government will guarantee timely payment of principal and interest to the securities’ investors in the event that the issuing association goes under. The collected fees will go into a government “Reserve Fund” and be used to make any payments under the guarantee and maintain balances in the Fund, similar to FDIC levies on its member institutions for the federal deposit insurance they provide.

Making the government guarantee explicit sounds nice, but it comes with its own set of problems. Indeed, a guarantee fee will be charged that presumably reflects the market value of the government backstop, but the fee will inevitably be underpriced because the government simply cannot successfully price for risk and there is such strong political pressure to lower fees in the name of cheaper mortgages. Especially since Congress has a poor track record of raiding funds like this to pay for big-government spending projects, leaving only an I.O.U. behind, there is little assurance that the Reserve Fund’s balances will be properly managed in preparation for future crises.

But even a properly-priced explicit guarantee fee does little to mitigate the severe moral hazard problems that arise with government support. Investors still stand to reap all of the gains from their investments and pin any catastrophic losses on taxpayers. This causes an overinvestment in housing that drives up prices, making a home purchase less, not more, affordable for American families. Ultimately, exposing taxpayers to the risk on these securities investments, instead of the mortgage-market investors that draw hefty profits from them, amounts to nothing more than a transfer of wealth, coming in the form of federal bailouts in a time of crisis.

In short, H.R. 1859 makes future bailouts for the housing sector the law of the land. Private capital and the Reserve Fund stand before taxpayer dollars, but there is no doubt that taxpayers are on the hook for billions of dollars in losses should we see another housing crisis. Voters did not send a new wave of lawmakers to Washington in November to codify more bailouts. Congress should put policies in place that allow a responsible transition to a completely private mortgage market, one that eliminates costly government subsidies and ends taxpayer bailouts.

Opponents of the “completely private” approach counter that without some form of government support to prop up mortgage-market investments, mortgage rates will rise significantly and desirable products like the 30-year fixed-rate mortgage will no longer be viable. However, a number economists and scholars, including Dr. Dwight Jaffee from UC Berkeley, have explained how a completely private market could function as efficiently, if not more efficiently, than one propped up with government subsidies. There is no convincing evidence that the 30-year fixed rate mortgage will disappear. Estimates show at most only modest interest rate increases in the absence of government support. The cost to taxpayers to bailout mortgage investors in the name of market stability ($154 billion and counting…) far outweighs the supposed benefits it provides.

With this in mind, Americans for Prosperity strongly opposes H.R. 1859, the Campbell-Peters Housing Finance Reform Act. It’s time that Fannie Mae and Freddie Mac give way to a completely privatized system that eliminates government subsidies and future bailouts.

Sincerely,

James Valvo
Director of Government Affairs
Americans for Prosperity

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