Former Treasury Secretary Timothy Geithner acknowledged in 2011 that a push to reduce the federal government’s involvement in the mortgage insurance industry is overwhelmingly Wall Street-friendly and potentially harmful to consumers.
Geithner then described the call to wind-down Fannie Mae and Freddie Mac using different language the Department eventually employed when assessing the proposal, according to a memo published Monday by The New York Times.
“The bank-centric model reduces distortion in the allocation of credit and preference for housing,” he noted. “However, this model benefits larger institutions that have better access to funding and the capacity to hold fully diversified portfolios of residential mortgate [sic] risk.”
The former Treasury Secretary then added that the privatization “could lead to increased concentration in the banking sector and higher costs for borrowers served by smaller institutions.”
Geithner made the analysis as Treasury was preparing a report for Congress on mortgage market reform in the wake of the 2008 subprime crisis and the enormous bailouts that followed.
The language never made the final report, which merely noted “smaller lenders and community banks could have a difficult time competing for business” if Fannie and Freddie are eliminated.
The home mortgage insurers are still in conservatorship, under the Federal Housing Finance Agency, after receiving a $187.5 billion emergency cash injection—since repaid–in the wake of the subprime mortgage crisis.
In 2012, statutory restrictions tightened on the activities of the so-called GSE’s (Government Sponsored Enterprises), when Congress passed a law requiring their quarterly profits to be transferred to the Treasury.
The move was designed to pave the way for more private activity in mortgage insurance, according to The Wall Street Journal. “Administration officials described the move as a way to ensure that the two firms aren’t revived as private companies,” the paper reported at the time.
Supporters of maintaining the so-called GSE (Government Sponsored Enterprise) system have pointed out, as The New York Times noted Monday, that Fannie and Freddie have, since 2012, brought taxpayers $53.8 billion in recent years. Opponents, it also noted, want to reduce taxpayer obligations and diminish the government’s hand in mortgage insurance; currently, Fannie and Freddie guarantee about 80 percent of American home loans.
The Times’ report largely focused on lobbying efforts to wind-up GSEs; specifically, on how key mortgage industry group players used the revolving door in a bid to advance their agenda.
The paper noted, for example, that at least one former administration official turned Mortgage Bankers Association President, David Stevens, while a high ranking Department Housing and Urban Development official between 2009 and 2011, met most frequently with industry groups.
One low-income housing advocate, Rober Gnaizda, told the Paper that “he ran into a wall of disinterest within the Obama admintistration when he tried to raise issues important to his constituents.”
The Times also noted that an elimination of Fannie Mae and Freddie Mac could, ironically, lead to greater government intervention down the road, in the event of another industry-wide catastrophe.
“[It] could imperil taxpayers because of the potential for even greater bailouts for financial institutions that Washington considers too important to be allowed to fail,” the paper noted.
