We received this e-mail from David Min on February 11 about our post titled, “Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs.” That piece took a dim view of a GSE “reform” proposal from the Center for American Progress, which we pointed out is “THE mainstream Democratic think tank for Congress and the administration”.
We must note that this message mischaracterizes some aspects of our post (for instance, we discussed at length in the our post why we thought the catastrophic risk fund would come up short, and this e-mail does not address our argument). Nevertheless, we thought readers would be interested in his message. From Min:
Let me introduce myself. I’ve been managing the Mortgage Finance Working Group that produced the proposal you’ve been very critical of.
I don’t suspect I’ll change your mind. That being said, I would be eager to have the chance to try. The key question, obviously, is whether a government guarantee/public option is necessary to ensure broad liquidity and consumer-friendly products (including the 30 yr FRM). I think the answer is no, and I think the evidence supports our view (including both the pre-New Deal era, the 2000s era when PLS took a 38% market share, and commercial real estate, all of which indicate to me private capital’s strong proclivity towards providing mortgage finance to the wealthy, in the form of products with terms that are highly beneficial to lenders/investors and highly onerous to consumers).
Regardless, I would ask that you make a couple of corrections in how you portray our proposal, in the interests of an honest debate.
I think there are two major mischaracterizations in how our proposal is described:
1) You state that our CMIs would be guaranteed by the government. In fact, the CMIs would explicitly not be guaranteed (and we have sloughed off most of the GSEs’ roles, so that CMIs only do a credit guarantee function, so we think that limitation on the guarantee is pretty credible); the government guarantee (and the Catastrophic Risk Insurance Fund we propose) would go directly to MBS investors, similar to the FDIC’s Deposit Insurance Fund.
2) You state that our insurance fund would not cover catastrophic risk. Again, that is not correct, as is clear from the name of the fund, the Catastrophic Risk Insurance Fund. CMI capital requirements (which would be 5-9x greater than current GSE requirements) would stand against non-catastrophic losses. Along with resolution authority, and the ability to issue “ex post facto” assessments if the Fund is running low, we strongly believe (although clearly one can never predict anything with 100% accuracy) that the taxpayer is fully protected.
I also think there’s a point you’re missing, in characterizing our proposal as “benefitting the banks”. The financial services lobby isn’t monolithic on housing finance reform. The Mortgage Bankers Association, for example, is primarily dominated by originating banks, who are primarily looking for conduits to sell their originated loans to: they don’t care if it’s GSEs, CMIs, MCGEs, or whatever, so long as they can resell their loans and keep their current business model (originate and re-sell) viable. On the other hand, the big investment banks (who do private-label securitization) and hedge funds/REITs (who would likely do a lot more lending activity if we privatized the whole thing) would, I think, stand to benefit far more from the privatization model. They’d take the vast majority of the $10+ trillion mortgage market, in the absence of a “public option” offering more affordable products. And arguably, they’d enjoy a public backing anyways (unless you think the government was prepared to let the mortgage market fail in a catastrophic event), just one that was unpaid for, implicit, vaguely defined, and at the institutional level (rather than limited to MBS).
As I said, I doubt I’m going to convince you, but would appreciate the opportunity to try, either to you or to your readers, presenting what I think is a large amount of evidence in favor of my view. Regardless, I’d appreciate the above corrections.
One final thing: our membership contains no financial institutions members, and while we have some affordable housing advocates, they by no means dominate our group, which consists of a number of leading academics among others. While I recognize that there are legitimate criticisms of our proposal, I don’t know that there’s a better option, and I certainly don’t think it’s a privatization model, as I think that would lead to a huge bonanza for Wall Street, a major negative setback for American households (essentially undoing the New Deal housing finance regime that I believe served this country very well for many decades), and much greater volatility and moral hazard to boot.
We will provide our response in a separate post.