In Washington, The More Things Change, The More They Stay The Same
First, as expected, the Federal Reserve decided to continue its program of buying $85 billion of Treasury Bonds and Mortgage-Backed Securities every month in order to keep interest rates low. According to the FED statement, it is prepared to “increase or reduce the pace of its purchases” depending on the outlook for the labor market and inflation. Translation: the FED thinks the economy still looks sluggish, but not so sluggish that it’s willing to make further prognostications on its future plans until it gets a clearer picture of what’s going on. Don’t expect an interest rate hike anytime soon.
Example number two is in President Obama’s nomination of North Carolina Democratic Congressman Mel Watt to head the Federal Housing Finance Agency, which oversees Fannie and Freddie. He would replace Ed DeMarco, who has held the post for three and one-half years.
First, why should you care? Because this position is evolving into the single most important position for housing policy in this country. Even though Fannie and Freddie went bankrupt and into debt to the American taxpayer for approximately $200 billion, the former GSEs have become more, not less, important, to the housing market. For example, these entities purchase about half the mortgages being financed in the country; and without Fannie and Freddie there would be no secondary market for credit unions, and banks for that matter, to sell their mortgages.
Second, for the next several years, anything that Fannie and Freddie is willing to purchase will be considered a qualified mortgage under the CFPBs qualified mortgage regulations. So let’s say the Congressman believes that underwriting standards are making it too difficult for people to buy a house, Fannie and Freddie could simply lower their standards.
Now, the only thing I know about the Congressman is that he represents the Charlotte area in North Carolina and is a long-serving member of the House Financial Services Committee. He is always good for an intelligent line of questions at committee hearings. But his nomination is a real head scratcher in some respects. First, it guarantees a contentious nomination battle. Republican senators are already saying how disappointed they are by the President’s choice and the liberal of liberals Massachusetts senator Elizabeth Warren is already kicking DeMarco on the way out the door for not doing enough to help the American consumer, who she, of course, feels was bamboozled into buying houses they couldn’t afford and who apparently now need more help to stay in those houses or buy other houses they can’t afford. Remember that with a divided Senate making confirmation unlikely and the legality of recess appointments in doubt, there’s a very good chance that Watt will never hold the position.
So in a worse case scenario, the scenario I consider to be most likely in this case, his nomination will serve as a proxy for a larger debate about housing policy while doing nothing to resolve the future of Fannie and Freddie or deciding the appropriate role of government in subsidizing mortgage lending in this country.
One more point, and then I’ll let you get on with your day. Even before they were taken into conservatorship in 2008 and we pretended that Fannie and Freddie were private corporations, the GSEs were already being criticized as being way stations for the politically connected. I have no idea what the Congressman’s plans are in his role, but the nomination of a Democratic Congressman will make it easy to argue that nothing really changes all that much in Washington.