G-fees are a danger in disguise

The House and Senate bills that would extend the payroll tax cut each contain a provision that would increase the fees (known as g-fees) that Fannie Mae and Freddie Mac charge for guaranteeing mortgages. The increased revenue would go directly to the Treasury. The American Banker has a story today that suggests there is support in the private sector for this increase because higher g-fees will enable private securitizers to compete more effectively with Fannie and Freddie, and thus may bring back the private securitization market that has been essentially moribund since the financial crisis in 2008.

Would it were true. At the margin, the theory is correct. Higher g-fees do indeed make it more likely that the private sector can compete with Fannie and Freddie, but sad to say this is highly unlikely to happen until a large number of additional obstacles—many of them in the Dodd-Frank Act—are cleared away. In testimony that I gave on November 3 at a hearing in the House Financial Services Committee, I listed nine impediments to the revival of a private market securitization market, in addition to the difficulty of competing with Fannie and Freddie. These include the high conforming loan limits at Fannie and Freddie (and now there are even higher ones for FHA that Congress adopted only a few weeks ago); the fact that Fannie, Freddie, and FHA are exempted from the risk-retention requirements of the Dodd-Frank Act; the threat that risk-retention poses to a “true sale” under accounting rules; and the effect of the Volcker rule on the ability of securitizers to hedge their risks. For a complete discussion of these and others, see the testimony here.

In addition, the American Banker article did not mention the most troubling part of the legislation—that it turns Fannie and Freddie into sources of funds for the government, estimated at $38 billion over ten years. That means, sadly, that if Congress is ever to do anything to eliminate or privatize Fannie and Freddie it will be necessary to find substitute funds or expense cuts of an equivalent amount. This is not impossible—there are some possibilities—but it makes the task much more difficult.

The bottom line is that with this provision in the tax cut extension act, Congress is in danger of cementing Fannie and Freddie into place as a permanent source of government revenue.

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