Sunday, February 13, 2011

The End of Fannie Mae

It's enough to make you believe in miracles: The Obama Administration is now on record as saying that Fannie Mae and Freddie Mac should go out of business. It took a global financial panic and $140 billion in taxpayer losses, but on Friday there it was in black-and-white in the U.S. Treasury's report to Congress on reforming the mortgage market: The Administration will "ultimately . . . wind down both institutions."

This marks a break with decades of bipartisan support and protection for the two government-sponsored giants of mortgage finance. Fannie Mae has its roots in the Roosevelt Administration, and a phalanx of bankers, mortgage lenders, homebuilders and Realtors worked together to keep the companies growing and federal mortgage subsidies flowing. Now even some Democrats—though not yet those on Capitol Hill—admit their business model was a catastrophe waiting to happen.

Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.

The $5 trillion question, however, is what would replace Fan and Fred. And here the Obama Administration has punted, offering the "pros and cons" of three broad proposals without endorsing any one of them.

Door No. 1 is the best of the lot by our lights. Under this option, federal guarantees would be limited to Federal Housing Administration (FHA) loans for lower-income buyers and VA assistance for veterans and farm programs—each a narrowly targeted market segment. A Treasury official says this would reduce the taxpayer backstop over time to about 10% to 15% of the mortgage market.

The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: "The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders' losses." Bravo.

Treasury points to other benefits: "With less incentive to invest in housing, more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets. Risk throughout the system may also be reduced, as private actors will not be as inclined to take on excessive risk without the assurance of a government guarantee behind them. And finally, direct taxpayer risk exposure to private losses in the mortgage market would be limited to the loans guaranteed by FHA and other narrowly targeted government loan programs: no longer would taxpayers be at direct risk for guarantees covering most of the nation's mortgages."

Those two paragraphs more or less sum up 20 years of Journal editorials on housing.

So what's not to like? The Administration says this option could reduce access to credit for some home buyers, and that it would leave the government without the tools to intervene in a future crisis. As for the credit point, other countries have high rates of home ownership with far less government support. If the government stands aside, it would open the way for alternative forms of finance, such as covered bonds, that now can't compete in the U.S. because of government favoritism for the 30-year mortgage model. This would open options for borrowers by increasing the diversity of financing.

As for a future crisis, government intervention is less likely to be needed if the market isn't distorted by government subsidies in the first place.

Behind Door No. 2 is a rump Fan or Fred, one that would stay small in "normal" times but stand ready to step in with Uncle Sam's firepower in a future housing-finance crisis. But as the Administration acknowledges, it would be difficult both to stay small and retain the capacity to go large when needed. We'd add that the political pressure to expand any federal mortgage-lending program would be too great for lawmakers to resist. Within a generation, the winding down of Fan and Fred would be unwound.

But the greatest danger lies behind Door No. 3, which looks like Fannie in a new suit. Under this last option, the Administration envisages a group of tightly regulated, well-capitalized private mortgage insurers whose policies would be backstopped by government reinsurance. The government would charge premiums for this insurance, "which would be used to cover future claims and recoup losses to protect taxpayers." This reintroduces the lethal mix of private profit and public risk by other means.

The problem with Fan and Fred from the beginning was not—despite the Administration's claims—that the profit motive corrupted their benign goals. Rather, the political influence and financial power of the housing lobby ensured that the companies operated outside the normal rules of politics and financial discipline. Thanks to an implicit government guarantee, the market never put any limit on their growth, even as their liabilities climbed into the trillions. Few politicians had the nerve to challenge a housing lobby that would attack them for opposing home ownership. The same political flaws would afflict a future reinsurer and its coterie of putatively private insurers.

The power of the housing lobby is implicit even in the Treasury's refusal to pick a preferred reform. As with entitlement reform, the Administration is leaving the hard work to House Republicans, who will bear the brunt of the political blowback. A reasonable GOP fear is that the Administration, whatever its rhetoric now, will pounce with a veto when it's politically advantageous—in, say, 2012.

Monday, February 7, 2011

Not one question about illegal immigration during O’Reilly/Obama interview

On Sunday, Fox News aired the much-advertised Bill O’Reilly interview with President Obama. The host of The Factor asked Obama about the ongoing unrest in Egypt, the healthcare bill and even if it bothered the president that “so many people hate” him?

However, O’Reilly failed to mention the looming elephant in the room…illegal immigration and the threat now posed to this country from the drug cartels.

Of course, it is undoubtedly an uncomfortable subject for Obama and it may have been deemed ‘off limits’ for the interview to take place.

Here are the questions that this reporter would have asked:

1) Your Homeland Security Secretary, Janet Napolitano, continues to say there is no “spillover violence” in this country from Mexico’s drug cartels. However, about 300 kidnappings are reported in Phoenix annually, and Americans are being murdered by drug smugglers. Most recently, Arizona rancher Rob Krentz and Border Patrol Agent Brian Terry were killed on U.S. soil.

So, in light of these occurrences…How can your administration continue to claim that Americans are not at risk from any “spillover violence?”

2) Last year, Department of Labor Secretary Hilda Solis, announced the “We Can Help” campaign designed to protect day laborers, even if they are illegal aliens. Solis sys the agency added 250 field investigators to enforce labor laws, but will not report those here illegally to Immigration and Customs Enforcement.

With actual unemployment in this country at 17 percent…How can you possibly justify such an effort?

3) During your recent State of the Union speech, you said: “I strongly believe that we should take on, once and for all, the issue of illegal immigration. I am prepared to work with Republicans and Democrats to protect our borders, enforce our laws and address the millions of undocumented workers who are now living in the shadows.”

However, federal law already dictates that we “protect our borders.”

We simply don’t do it.

The invasion of this country by the violent Mexican drug cartels and the hellish life they have created for those Americans living in the American Southwest presents a clear and present danger, and is one that only the U.S. military can adequately answer.

Why when we use our military to protect the borders of countries such South Korea and Iraq, can’t we use those same active duty troops to protect our own country?

4) In 2006, Congress passed and President Bush signed into law, the Secure Fence Act was supposed to see to it that 700 miles of double-layered, barbed wire fence was built along the U.S./Mexican border, along with more vehicle barriers and manned checkpoints, only about 30 miles of the double-layered, 14-foot high fencing has actually been built.

According to the Department of Homeland Security, only 34.3 miles of double-layered fencing has been completed along the border. Most of that, (13.5 miles), is in Texas, with 11.8 miles in California and a mere 9.1 miles of double-layer fencing now sits along the border in Arizona.

In fact, in early 2009, the Government Accountability Office reported that only 32 miles of double-layered fencing had been constructed. As Sen. Jim DeMint (R-SC) pointed out in a May 2010 Human Events op-ed: “That means under President Obama, only 2.3 miles of it has been built over an entire year.”

Why have you stopped building the fence that would greatly improve our security?

5) Because the federal government has refused to defend the border and enforce immigration laws, there are about states around the country are now enacting their own legislation to do so.

Do you plan on suing those states, along with Arizona?

6) Finally, Mr. President, I have to tell you that I sort through dozens of crimes committed by illegal aliens on a daily basis. Those crimes include DUIs, child molestation, rape and murder.

I have also spoken to many Americans who have lost family members at the hands of criminal aliens, many of whom tell me they no longer recognize their own country, and cannot understand why the federal government allows millions of illegal aliens to remain here.

What would you say to those folks?

Tuesday, February 1, 2011

Obama's health care law may boil down to a single judge

Four federal judges have reviewed President Obama's health care law and split evenly on whether it is constitutional -- now four appeals courts get their chance.

Millions of voters have offered their views of the health care plan, and so have 535 members of Congress.

In the end, the fate of Obama's signature domestic program may well boil down to a single person: U.S. Supreme Court Justice Anthony Kennedy.

"Nothing matters in the federal courts until Anthony Kennedy flips his magic coin," writes the Ace of Spades HQ blog. MSNBC's Joe Scarborough, a lawyer and a former congressman, said this morning, "It's going to come down to Anthony Kennedy."

Many observers, including some in the White House, expect health care lawsuits to wind up in the U.S. Supreme Court and suspect it could wind up being one of those 5-4 decisions.

Supporters of the health care law have high hopes for four Democrat-appointed justices: Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan.

Opponents of what they call "Obamacare" count on four Republican-appointed conservatives: Chief Justice John Roberts, Antonin Scalia, Clarence Thomas and Samuel Alito.

That leaves Justice Kennedy, a Ronald Reagan appointee who often decides 5-4 cases.

Congressional Republicans say they will maintain efforts to repeal the health care law or at least undercut its funding.

Health care will probably play a major political role when President Obama seeks re-election in 2012 -- perhaps the same year the Supreme Court takes up the health care case.