They called it “Gucci Gulch.”
All throughout 1986, while legislators hammered out the biggest tax reform package in American history, special-interest groups and their expensively-shod lawyers gathered in the halls of Congress, trying to make sure their concerns were reflected in the policy being drafted.
A popular book immortalized the idea of Gucci Gulch, a place where lawmakers and representatives of the people pull all-nighters in the pursuit of Big Policy Goals — and the conceit gets trotted out any time Big Policy, especially if it concerns taxes or financial services, is up for discussion.
Now, on the eve of what might be the biggest overhaul of the housing finance system in decades, the interest groups are once again mobilizing. The white papers are being written and re-written. The panelists are taking the mikes. Fancy shoes are, presumably, being polished up.
And Washington-watchers say it’s all for naught.
There will be no Gucci Gulch -– no late-night pizzas and back-and-forth until compromise is painstakingly reached – attending the attempts to release Fannie Mae
and Freddie Mac
from the government control in which they’ve languished since the 2008 financial crisis. Instead, according to multiple sources interviewed by MarketWatch, this policy process will be a completely different animal.
That is, if anything gets done at all.
The Senate Banking Committee is holding hearings on GSE reform over two days this week, after its chairman, Sen. Mike Crapo, introduced what the Idaho Republican called a housing reform outline. Read our take on the first day of testimony here.
But, perhaps thanks to the fool-me-once nature of the debate over Fannie and Freddie – Congress has been trying to get them out of conservatorship nearly as long as they’ve been in – many Washington-watchers think the most likely outcome is no change at all.
‘It’s just not clear to me that there’s any substantive solution with a broad enough ideological buy-in that can pass both chambers of Congress and receive the president’s approval,” said Aaron Klein, a fellow at the Brookings Institution. Klein helped draft the 2008 Housing and Economic Recovery Act, the legislation that created a temporary tourniquet for housing finance until the crisis had abated and permanent legislation could be enacted.
Klein and other observers reject the assumption that reform is finally at hand. That belief has swirled ever since MarketWatch and other publications first reported that the Trump administration had already begun the process of hammering out a reform plan once its hand-picked regulator, Mark Calabria, took the reins. “A lot of people in the market have gotten out a little over their skis on the probability and speed of reform,” Klein said.
“I put it at 80%-90% nothing will happen,” said Robert Litan, also a Brookings fellow who formerly worked for the government on financial services policy issues.
Fannie and Freddie have become the pillars of American housing finance, Litan said, and the system they’ve made possible “has become the equivalent of an entitlement.”
“When you have an entitlement that benefits a middle class that’s gotten hammered, the last thing politicians want to do is take away something that benefits their biggest asset” – particularly in the lead-up to a presidential election, Litan said.
Jeff Hauser, executive director of the DC-based Revolving Door Project, takes a slightly different view. Capitol Hill isn’t driving this particular debate, Hauser believes: Wall Street is.
“It’s been pretty clear that since early January, Otting and Calabria have been putting out signals that are positive toward the hedge fund investors,” Hauser said.
Joseph Otting is the administration’s acting director of the Federal Housing Finance Agency, Fannie and Freddie’s regulator; Calabria, who has been nominated to hold the post permanently, also helped draft the 2008 legislation known as HERA.
“This is what I suspected might occur in late 2016 when I noticed that John Paulson’s protégé, Steven Mnuchin, was taking over the Treasury,” Hauser said. “The name Otting didn’t move markets when initially announced on December 21 but around the time he officially started at FHFA the stock started moving.”
It’s worth noting that Hauser’s group is one of two that sent letters to inspectors general of the U.S. Treasury and FHFA asking for investigations into whether federal officials improperly shared information about their intentions for Fannie and Freddie, including by leaking such information to MarketWatch and other publications.
Hauser is outright “skeptical” that Congress will take any action on Fannie-Freddie reform, and he also believes “2018 Washington isn’t well-suited” to the kind of deal-making that took place in Gucci Gulch, he said. But his overriding belief is that any “reform” efforts that are undertaken will have the goal not of establishing a new path for housing finance, but bringing about a “favorable” turn of events for investors.
“I read the market as saying the hedge fund investors are rightly optimistic they will get some form of positive outcome out of the executive branch,” Hauser told MarketWatch. (“The market” in this case, common shares of Fannie and Freddie, are up 144% and 130%, respectively, in 2019.)
David Dworkin is president and CEO of the National Housing Conference, a nonprofit that advocates for affordable housing. Dworkin sees more nuance in Secretary Mnuchin’s intentions, and is among the very few housing-watchers in Washington who believe GSE reform is going to happen.
“We have the first treasury secretary in American history who has professional experience running portions of the mortgage markets,” Dworkin said. “He appreciates their value and is highly committed to not leaving Treasury with the GSEs still in conservatorship.”
It isn’t just Mnuchin’s appreciation for a functional housing finance system that argues for reform sooner rather than later, Dworkin said in an interview. It’s also that he is assured that there is valid legal standing for the Treasury and the GSE’s regulator to enact reforms.
That belief is grounded in an appearance by Mnuchin before the House Financial Services Committee about a year ago, in which he engaged in what seemed to be a highly scripted back-and-forth with then-committee Chairman Jeb Hensarling.
“If we once again fail to act, isn’t it true that roughly a year from now the president gets to appoint a new FHFA director who will serve for a five year term, is that correct?” Hensarling asked.
“That is correct,” Mnuchin said.
“Isn’t it true that the FHFA director is not just the regulator of the GSEs but also the conservator, isn’t that correct?” Hensarling asked.
“That is correct,” Mnuchin said.
“Isn’t it true that as conservator the FHFA director has broad sweeping powers? For example, is it not true that if Congress fails to act, the FHFA director could discontinue the GSE’s HARP, or Home Affordable Refinance Program? Isn’t that true?” Hensarling asked.
“That is correct, Mr. Chairman,” Mnuchin responded.
The two continued on like that for a few more minutes. Some analysts thought that Hensarling was trying to send a message to Committee Democrats, who prized programs like HARP, that they should go along with his ideas for reform or lose the chance altogether when a new FHFA director was appointed in 2019. But Dworkin interpreted the exchange as the introduction of a blueprint for how the administration could work in concert with Congress to get reform done.
“They’re really telling us that if Congress doesn’t act, the administration has enormous powers, but that it’s better if they act together,” Dworkin said. “We’re beginning to see, with the nomination of Mark Calabria as FHFA director, and the actions and statements made by acting FHFA Director Otting, the beginning of this process unfolding.”
Dworkin envisions reform unfolding in what he calls a “dual-track” approach, with the Administration and Congress goading each other along. And he thinks the outline for what reform looks like is also pretty well established.
(The Housing and Economic Recovery Act, which put Fannie and Freddie into conservatorship), “which Calabria helped write, contains 80% of what we need to do to fix Fannie and Freddie,” Dworkin said. “We can make the rest of the changes if we can find agreement that this is the model we need going forward.”
Dworkin believes that the next iteration of housing finance is what he calls “HERA-plus.” The “plus” would involve an explicit paid-for government guarantee on mortgage bonds issued by Fannie and Freddie, and stronger powers for the regulator of the two enterprises.
It’s worth noting that while many parties interested in reform have indeed agreed on much of the broad outline of the future housing finance state, not all have made their peace with it. And in any policy area, let alone one that does $1.6 trillion of business every year, there are plenty of stakeholders whose livelihood depends on what may seem like small details to casual observers.
Still, as Dworkin put it, “HERA-plus is a good place to be. We don’t really appreciate the changes we made because the crisis evolved so fast. There are some things we missed but we’ve spent 10 years trying to come up with an alternative path to the 30-year fixed-rate mortgage that precludes the GSEs and we have not been able to do it. After 10 years, it’s not unreasonable to say we should go back to first principles, not back to the drawing board.”
Having Calabria, someone many Washington-watchers respect for his ability to find common ground on this thorny topic, at the helm of FHFA, could also help ensure this finally gets done, Dworkin thinks.
“Sometimes you need a Nixon to go to China and a Paulson to save the banks,” he said. “Calabria could be that person who’s uniquely qualified to find the middle ground on the GSEs.”
And maybe it can be achieved without Guccis.