Obama Approves of Johnson-Crapo Housing Finance Reform Bill. What Could Go Wrong?

Alarm bells sounded when Sen. Tim Johnson (D-SD) and Sen. Michael Crapo (R-ID) 82% released their new housing finance reform bill.  That this legislation is being hailed as bipartisan was the first sign taxpayers should be worried.  The Obama administration has also signaled its tacit approval.  Watch out.

Late last week, Department of Housing and Urban Development Secretary Sean Donovan and the National Economic Council Director Jeff Zients met to discuss housing finance reform with all the major housing advocates.  All of these groups – such as the National Association of Realtors (NAR), the Mortgage Bankers Association, the National Association of Home Builders and the Independent Community Bankers of America – have a vested interest in maintaining some version of the old government-sponsored enterprise (GSE) system.

The NAR has been particularly vocal since Fannie and Freddie were taken into Federal conservatorship.  NAR president Steve Brown admitted his group wants a Federal loan guarantee, but he framed this desire very carefully:

We want to see reform go ahead and take place now. By settling this issue, it will bring stability to this market, which is critical. The Great Recession shows that there are imperfections.

Aside from the massive understatement relating to the Great Recession, Brown refused to accept the possibility that federal guarantees could have caused the 2008 crisis.  Brown and other advocates are quick to praise Johnson-Crapo as a bipartisan approach precisely because it gives them what they want: explicit government guarantees in the housing market.

Just as its Senate companion, sponsored by Sen. Bob Corker (R-TN) 50% and Sen. Mark Warner (D-VA) 7%, Johnson-Crapo creates the Federal Mortgage Insurance Corporation (FMIC).  This approach is being sold as an improvement over the old system because it requires private capital to share in any losses.  Both Senate bills require a 10 percent first-loss provision, meaning that the FMIC picks up losses only after private investors lose their 10 percent.

Oddly, Johnson-Crapo renders this risk-sharing meaningless.  Section 305 of the bill allows the FMIC to waive the risk-sharing provision in the event of a financial crisis.  In other words, 90 percent of private investors’ losses are covered unless there’s a crisis, in which case all of the losses will be covered.

That’s not much of an improvement considering that taxpayers didn’t have to foot the bill for Fannie and Freddie until a crisis hit.  The system envisioned in Johnson-Crapo leaves us with more moral hazard than the GSE system that crashed in 2008.

Simply put, this new proposal is worse than the old system.

Explicit taxpayer backing for securities, new versions of the affordable housing goals, and a new federal regulator all add up to more moral hazard than before the 2008 crash.  Between these Senate bills and the Dodd-Frank Act, the housing finance market will essentially be taken over by the Federal government.

The words “bipartisan” and “reform” mean nothing if a bill results in a system that’s more dangerous for American taxpayers than the current one.

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Johnson-Crapo Housing Finance Reform Bill would create a system worse than the old system.

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The word “bipartisan” means nothing if American taxpayers have to assume more risk.

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Obama administration has also signaled its tacit approval of Johnson-Crapo Housing Finance Reform Bill

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2 thoughts on “Obama Approves of Johnson-Crapo Housing Finance Reform Bill. What Could Go Wrong?

  1. Yikes. The moral corruption of the government feeds on the massive amount of legalese to sift through to get a real facts, then all the static thrown up in the air by entrenched interests. The media doesn’t help, especially when they are compromised by having to provide ‘info-tainment’ in terms of providing only red meat to their constituency rather than objective facts.

  2. This is the biggest financial scam of the century. The economic crisis of 2008 was due to Congress compromising underwriting standards and their coercion and intimidation of banks wary of conceding to dangerous lending practices who then in turn dumped these high risk loans on Fannie’s and Freddie’s balance sheets.

    It is becoming increasing obvious we have a cover up in the making. Now, Congress proposes to eliminate Fannie and Freddie and replace them with entities that will do the same thing. Does that sound like an exercise in productivity?

    It starts to make sense when you realize there are at least 18 lawsuits against the government for their mishandling of Fannie and Freddie. The discovery process for some of the lawsuits is about to kick off and they want Fannie and Freddie gone before more corruption and fraud are uncovered

    In addition to the events preceding the crisis which Congress was responsible for we so far know the government was involved in insider trading, compromise of shareholder rights, 5th amendment violations, and that they couldn’t even follow laws they previously enacted regarding conservatorship such as the Housing and Economic Reform Act of 2008.

    The list will go on and on as more is discovered throughout trials. This isn’t about housing reform or ‘protecting the taxpayer’. Senators Corker, Crapo, Johnson, and Warner are lying to those who elected them. Government is just trying to cover its butt.

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