The 800-Pound Platypus

Written by Phil Hall
on March 08, 2010 No Comments
Categories : Blog View

BLOG VIEW: If you were holding your breath in anticipation of the Obama administration's plans to reform the government-sponsored enterprises (GSEs), I would recommend exhaling. Either that or you'll have to keep holding your breath for another year.

As you probably know by now, the administration looked the GSE monster in the eyes and blinked. Rather than confront the issue of how to remove Fannie Mae and Freddie Mac from federal conservatorship, the administration decided to leave things as they are for another year. Even worse, the administration will not include the GSEs in its fiscal year 2011 budget – and that's no mean feat, considering the billions of dollars in losses that the GSEs have been ringing up.

But then again, the administration is not the only one to drop the proverbial ball. Federal Reserve Chairman Ben Bernanke, in his Feb. 25 testimony before the Senate Banking Committee, compared the GSEs to a platypus, noting that they operated in a ‘neither fish nor fowl status.’ But he put the onus on Congress to figure out what to do with the GSEs – the Fed has no ideas to share.

Congress, however, isn't exactly functioning as a mission control for cogent planning. The struggle to get a new government agency aimed at ensuring consumer financial protection is stuck in an endless tug-of-war, which has made the whole 2008 mantra of reform a joke – and if Congress cannot create a single agency, can we expect it to recreate existing entities?

Furthermore, the political climate has deteriorated to a point where the two parties have thrown the notion of bipartisanship away in favor of intransigence. If one side of the aisle were to propose an idea of how to handle the GSE crisis, the other side would immediately reject it – not because of the merits of the idea, but because it came from the opposite party. This puerility will most likely be the congressional modus operandi until after Election Day – and probably beyond, if the power schematics remain close to where they are today.

So where does this leave the mortgage banking industry? Pretty much where it was last year, with Fannie Mae and Freddie Mac as the dominant secondary market players and no effort by the federal government to work toward the serious recovery of the private-label market.

Admittedly, Washington is not lacking crises relating to the financial services industry – falling property values, foreclosures, delinquencies, strategic defaults on underwater mortgages, a never-ending wave of failed banks and the convulsions starting to affect the commercial real estate sector still prevail. I assume the only person making money in Washington nowadays is the guy who runs the aspirin concession.

But having the secondary market dominated by GSEs that have been running on empty since September 2008 and are propped up for another year with billions in taxpayer funds is an inconvenient fact that no one wants to address. You are familiar with the 800-pound gorilla? Well, say hello to the 800-pound platypus!

‘Fannie and Freddie are in conservatorship,’ said Bernanke during his Senate testimony. ‘They are part of the government's efforts to maintain the housing market, because there really is no other source of mortgages at this point or mortgage securitization. But, certainly, this is not a sustainable situation.’

Bernanke should be thanked for stating the obvious. Hopefully, his words will be taken as a call for action and not as a lament.

– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]

[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]

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