News: The Wrong Stuff? GOP fumes over Freddie

Tuesday, June 25, 2024

The Wrong Stuff? GOP fumes over Freddie

Jun 25, 2024

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QUICK FIX

The decision by the Biden administration’s top housing regulator to approve a pilot program expanding the government’s footprint in the market Friday evening is a “political stunt” to boost consumer spending before the election, Republicans said.

“It is telling that the FHFA decided to conditionally approve the pilot program late on a Friday,” said Sen. Bill Hagerty, who led a GOP comment letter against the initiative in May after it was proposed. The pilot “remains seriously flawed and is clearly being expedited for political purposes ahead of Biden’s November election contest,” he said.

“This isn’t thoughtful housing policy, it’s just another ploy to goose consumer spending ahead of the election,” Hagerty added.

The Federal Housing Finance Agency gave the green light to the program allowing Freddie Mac to purchase second mortgages, in a bid to give homeowners a less costly way to tap the equity in their homes after the recent surge in prices. Critics say it will encourage “equity-stripping” and add to consumer debt levels right just as the economy slows.

In response to a flood of concerns over the original proposal, the regulator limited Freddie to $2.5 billion in purchases of second mortgages, with the length of the mortgage limited to 18 months and the loans capped at just above $78,000. Only homeowners who have owned their home for at least two years would qualify, and they could only tap the equity in their primary residences.

But Republicans are unmoved by the new conditions: “This administration ignored bipartisan concerns, including mine,” Senate Banking Committee ranking member Sen. Tim Scott said in an email. “Here’s the reality: Encouraging homeowners to strip equity out of their homes is a political stunt that puts taxpayers on the hook and the safety and soundness of the U.S. housing market at risk.”

Rep. French Hill — who is running to be the top Republican on the House Financial Services Committee — agreed: “This pilot is just a presidential campaign-year stunt aimed at helping rich people take out home equity,” Hill said in an email. “FHFA should be focused on safety and soundness and building capital” at Freddie and sister company Fannie Mae, the giant, government-run companies that stand behind half the country’s residential mortgages.

Ultimately the fate of the program rests on the presidential election. Because the pilot is a product rather than a rule, it will not be subject to reversal under the Congressional Review Act, meaning it would take a new administration to repeal it. “A Trump victory likely results in the program expiring in 18 months while a Biden win likely means it will be made permanent and extended to both GSEs,” TD Cowen analyst Jaret Seiberg wrote in a client note.

Structured Finance Association CEO Michael Bright worries that the new limits could eventually disappear.

“Obviously, the concern is that pilot programs don’t stay pilots — they start up as a pilot and then grow exponentially beyond that,” Bright said. “If they launched it without limits, it could kill the private market.”

FHFA spokeswoman Lydia Holt said, “pilots are a vital tool to test, learn, and in some cases, be scaled towards permanent policy.”

“No additional actions outside the scope of the pilot would occur until FHFA has analyzed the data from the current pilot, determined if the objectives have been met, and submitted a new product for an official public notice and comment process,” Holt added. “If Fannie Mae makes a similar request, it will be evaluated according to the terms of the New Enterprise Products and Activities regulation.”

The Housing Policy Council, an industry trade organization, believes the program is not in the public interest, according to HPC President and former acting FHFA Director Ed DeMarco. DeMarco said the second-lien program, and a separate pilot by Fannie Mae to bypass title insurance on certain loans, suggest the GSEs are reverting to what he said were risky past practices.

Fannie and Freddie were aggressive market actors before the government seized them in September 2008 to stave off catastrophic losses during the global financial crisis. FHFA has been their conservator ever since, as repeated efforts to reform the companies have foundered on debates over their proper role.

“In some ways, it feels like it's starting to look like it did pre-conservatorship, which is the reason this whole new product rule is in the statute — because of a lot of public concern about how Fannie and Freddie pre-conservatorship were using the benefits of their special subsidized GSE charter to get into areas that were outside of the core mission and purpose of the GSEs,” DeMarco said.

IT’S TUESDAY — Drop me a line at kodonnell@politico.com. And as always, send tips and suggestions to ssutton@politico.com or on Signal at 925.216.7576.

Driving the Week

Fed Gov. Michelle Bowman will speak at a Policy Exchange and Nexus Strategic Communications event on U.S. monetary policy and bank capital reforms at 7 a.m. … The Consumer Confidence Index is out at 10 a.m. …Fed Gov. Lisa Cook will speak at an Economic Club of New York luncheon at noon … White House Council of Economic Advisers Chair Jared Bernstein will speak at a Brookings Institution event on the Organization for Economic Co-operation and Development Survey of the United States at 2:30 p.m.…

Regulatory Corner

— Fed floats weaker version of planned bank capital overhaul — Bloomberg reports: “The Federal Reserve has shown other U.S. regulators a three-page document of possible changes to their bank-capital overhaul that would significantly lighten the load on Wall Street lenders, according to people familiar with the matter.

“The revisions would walk back key parts of the landmark proposal — including one that might have had a large effect on big banks with sizable trading businesses, said the people, who asked not to be identified discussing details that aren’t public. The Fed document doesn’t include an updated estimate on how much additional capital that large banks would have to hold as a cushion against financial shocks.”

— Court blocks part of Biden’s student loan repayment plan for millions — Our Michael Stratford and Bianca Quilantan report: “A pair of federal judges on Monday halted key parts of President Joe Biden’s new student loan repayment program, imperiling the administration’s plan to lower monthly payments and erase student debt for millions of Americans ahead of the November election.

“The two court rulings, in response to lawsuits filed by Republican-led states, prohibit the Education Department from moving ahead with major provisions of Biden’s SAVE loan repayment program. The decisions prevent the Biden administration from further reducing the monthly payments of millions of borrowers as planned in July or canceling more debt under the program.”

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Fintech

— SBA-blessed fintech surrenders license in sale — Our Zachary Warmbrodt reports: “The U.S. arm of fintech firm Funding Circle is being sold to new owners and giving up its license to issue government-backed SBA loans, an agency decision that had triggered bipartisan criticism…House and Senate lawmakers have been scrutinizing the SBA's decision to grant a lending license to Funding Circle, a landmark embrace of fintech that was also accompanied by a softening of underwriting standards.

“The Biden administration has argued that permitting more nontraditional lenders to offer SBA loans would help reach underserved business owners. Critics have questioned whether the SBA is equipped to regulate fintech lenders. Those concerns escalated when Funding Circle cast doubt on the future of its U.S. operations in March after winning the SBA license.”

House Small Business Chair Roger Williams and Senate Small Business ranking member Joni Ernst released a joint statement saying the company should never have received an SBA license. “We are pleased to see this license returned to the SBA, but remain concerned on how a company with such a weak financial position was granted a license in the first place,” they said.

Fly Around

— The Chamber’s resiliency push — The Chamber of Commerce has a new report detailing how public-private investments in resilience and disaster preparedness can yield major savings in the event of a flood, fire or other catastrophe. Each dollar invested can yield as much as $13 in economic impact, damage and cleanup costs, according to the study, which also encourages the promotion of public-private partnerships.

“The economics are there. Building a business case for both governments and the private sector investment is what we're really interested in here,” Chuck Chaitovitz, the Chamber’s vice president for environmental affairs and sustainability, told MM.

— ESG opponents hit RNC — The State Financial Officers Foundation, a leading right-leaning group that has taken aim at sustainable investing, will be hosting an event on the sidelines of the Republican National Convention next month in Milwaukee to raise awareness about the issue, our Jordan Wolman reports.

“Financial officers have an especially important role to play in ensuring politics are never prioritized over profits when it comes to Americans' hard-earned retirement and pension dollars,” SFOF CEO Derek Kreifels told POLITICO in a statement. “The State Financial Officers Foundation and our members are engaged with policymakers at all levels helping to educate them on the dangers of ESG and all efforts that run counter to fiduciary duty.”

Kreifels wouldn’t share details of who would be attending the event. But it shows how efforts to oppose corporate environmental, social and governance principles are still alive within national GOP circles despite its lack of resonance with both the general electorate and Republican voters in particular.

— How Jeff Yass became one of the most influential billionaires in the 2024 election — Bloomberg digs into a “former Never Trumper who’s recently softened to become an OK-Fine-Might-As-Well-Be Trumper” Jeff Yass, who oversees Susquehanna International Group. “In keeping with his background as a Wall Street veteran and obsessive poker player, he’s organized most of his life around principles of rational bets, always weighing the ‘expected value,’ or potential payoff, of everything from securities pricing to fantasy football drafting. The expected value of a second Trump term was starting to look greater than zero. The calculation wasn’t insignificant—Yass is one of the largest individual donors in the 2024 federal election cycle.”

— Goldman appoints oil tycoon Hess to board — Goldman Sachs has appointed oil tycoon John Hess — whose company the bank recently advised on a $53 billion takeover by Chevron – to its board.

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