Demystifying GSE Credit Risk Transfer: Special Interests and Politicization
My third, and final, paper demystifying the single-family mortgage credit risk transfer (CRT) program of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac describes a years-long series of attempts to politicize the program. The politicization took the form of attempts by special interests to force CRT program changes to their advantage through the power of government. The paper also analyzes – and often debunks – key narratives and misconceptions promoted to support those special interest attempts. More broadly, it serves as a case study to illustrate how politicization actually works, warts and all, at the boots-on-the-ground level in today’s Washington.
As I have written many times, politicization plays a major role in GSE activity, and in housing finance more broadly. However, unusual for a major change in the business model of the GSEs, CRT was developed largely off the special interest radar screen. This happened for two reasons: first, when CRT was developed (2012-13), housing finance groups and policy specialists were heavily focused on creating proposals to replace the GSEs, rather than reform them; second, CRT’s development took place “inside of conservatorship” rather than via the more common and visible legislative or regulatory process. The CRT program was therefore built free from the lobbying and influence of special interests that otherwise would have attempted to force changes to their advantage. Instead, it was primarily a business-like and somewhat technical program to reduce the taxpayer’s exposure to GSE mortgage risks on an economically efficient basis.
However, CRT did eventually appear on the radar screen of the special interests. They belatedly recognized it as a major change in the GSE business model beginning in 2015, two years after the first transactions and at a time when the program was already going strong. At that point, their lobbying and influencing activities began, driven mostly by commercial groups seeking to protect or increase profits. Sometimes those activities were propelled by ideologically-driven organizations looking to enhance or reduce the government’s role in the economy versus the private sector’s. Once in a while, they were driven by people seeking political power. At times, it was a combination of two or all three of these motives. The intentionally-biased narratives produced to support these lobbying and influencing efforts unfortunately then led to misconceptions about CRT, a field that is so specific and technical that few policymakers are positioned to separate what is false or misleading versus not.
My new paper describes several prominent attempts to utilize the power of government to change the direction of the CRT program. These include:
- Attempts to exploit or create regulatory arbitrage;
- Attempts to lobby Congress to pass legislation, or regulators to make rules, to force CRT transactions and revenues toward the firms backing the lobbying (despite, as a byproduct, promoting transactions that are not truly effective);
- The development of misleading – and at times simply untrue – narratives to appeal to or fool various groups inside the beltway.
Against the odds, these attempts had only a minor impact on the CRT program during my tenure as CEO of Freddie Mac (which ended mid-2019). Credit for this goes mainly to the Federal Housing Finance Agency (FHFA) (under its leadership at the time) and to the US Treasury, for having the courage to keep the program non-politicized, which makes it an outlier in GSE and housing finance activities. The program therefore is still based on economic efficiency and not special interest requirements. It should not be taken for granted, however, that this lack of politicization is the end of the story, for two reasons. First, the politicization attempts continue, with no end in sight – that’s the way special interests work, seemingly relentless. Second, just last month a large and dark cloud appeared on the horizon: the FHFA, as regulator of the GSEs, put out for public comment a proposed new GSE minimum regulatory capital requirement. As FHFA is under new leadership since last year that has a strong free-market (and therefore anti-GSE) ideological pedigree, it was feared the proposed rule would emphasize non-economic capital requirements at a level designed to cause the GSEs to shrink which, as collateral damage, would render the CRT program falsely uneconomic. In fact, it came out worse than expected: not only does the proposal emphasize high non-economic capital requirements, it also includes a specific anti-CRT bias, which has been taken by many housing finance policy specialists as an attempt to deliberately render the program uneconomic and thus ensure its likely demise. This all may or may not be revised as FHFA goes through its public comment and revision process, which should finish late in 2020; until then, the future role of CRT is very much up in the air.