Rolling the Dice with Congressman Barney Frank

Barney Frank, D-MA, takes  gamblers’  interests to heart.  As Chairman of the House Financial Services Committee (HFSC), he plans to replace the Unlawful Internet Gambling Enforcement Act (UIGEA), a regulation made in the “midnight hours” of the previous Administration, with better legislation of his own.  The UIGEA as written, he says, “would curtail the freedom of Americans to use the internet as they choose.” If only Congressman Frank’s interest in gambling stopped here.  If only Congressman Frank merely dabbled in the occasional lottery ticket.  Hold on for your life, because Chairman Frank is doubling down on some of the disastrous policies that brought on the financial crisis and got the world into deep and enduring recession.

Chairman Frank is a firm believer that our recession is a result of inadequate regulation of the financial sector in general and Wall Street in particular.  His is a belief shared by many.  What distinguishes Mr. Frank from the pack is that he also supports policies in mortgage markets that encourage large loans as reckless as the smaller ones that got us into this mess in the first place. What further distinguishes Mr. Frank from the pack is his political power as Chair of HFSC.  He’s using it to gamble with our future.

The mandate of Frank’s “House Banking Committee” is to oversee the entire financial services industry.  In addition to being watchdog for banking, Frank must understand and monitor the securities, insurance and housing industries.  He and his committee also oversee actions not only by the Federal Reserve and the Treasury (who won his approval by deciding to delay enforcement of UIGEA), but also by the U.S. Securities and Exchange Commission and other financial-service regulators too numerous to itemize here. Frank’s job, in brief, is to study both scamps and saviors across the financial spectrum. His responsibilities are national in reach and global in consequence.

At first glance Chairman Frank looks like a player with a prudent aversion to excess risk. He thinks the government is responsible for the credit crisis because it failed to discipline and restrain Big Banks.  He thinks the solution is more invasively to regulate the financial sector, and on October 29, he held an HFSC meeting the purpose of which was to figure out how to wind down its failing giants without taxpayer funding. “We are,” he said, “going to reform securitization with some risk retention, we are restricting irresponsible subprime loans, we are regulating derivatives, there will be no unreported, no unregistered large enterprises going forward; we will have the ability to significantly increase capital requirements more than proportionally.”

At the same time, Congressman Frank worries about housing and the poor.  So, on October 8, Chairman Frank introduced HR 3766 to his Committee.  Nicknamed “Main Street TARP Act of 2009,” it advocates transferring $1 billion to the National Housing Trust Fund (NHTF) from the Troubled Asset Relief Program (TARP), known in the vernacular as the “Bank Bailout Program”. NHTF is a worthy program established by Bush 43 to help “the lowest income people in our country with the most serious needs,” addressing the specific need for shelter by creating and maintaining affordable rentals.  This seems a more sensible approach than helping the poor buy houses with mortgage payments they can’t sustain.  But so far, it’s just a goal.  NHTF has no money.

Support for funding NHTF fortunately appears to be gaining momentum.  October 29 was a momentous day for the hard-working Congressman: in addition to advancing banking risk- regulation, he publicly thanked Barack Obama for advancing HR 3766 with the his proposed FY 2010 budget for the Department of Housing and Urban Development.  “I appreciate the Obama Administration’s strong support of two important housing related items that are in the jurisdiction of the Financial Services Committee,” the Congressman said. First, “The Trust Fund is essential both socially and economically. It will provide relief for low-income people who are unable to find decent affordable housing; and by funding rental housing, it will provide an alternative to pushing people into homeownership who cannot afford it. This combination of a lack of rental housing and an excessive emphasis on homeownership was a contributing factor to our current situation.”

It sounds like Chairman Frank has been taking some sensible steps to advance safe banking and increase affordable housing, but his poker face hides support for the big bets still being placed on housing.  Barney Frank is about to introduce legislation that would raise to $839.750 the ceiling on mortgages the Federal Housing Authority (FHA) can underwrite. That zero is not a mistake; the comma’s not misplaced.  $839,750.

The second “item” Obama supports and Frank applauds is the recent vote by Congress to extend for another year the Economic Stimulus Act of 2008’s “temporary” and twofold increase in the ceiling for loans the FHA will insure. “The need for higher loan limits on a regional basis,” Frank explained, “is simply a recognition that housing values are the most geographically variable segment of our economy. This will provide regional fairness, and necessary and appropriate support for homeownership.”  Frank’s legislative proposal would add $100,000 to today’s maximum of $739,750 — and then make the new sum permanent.

Even the high cost of living in certain areas of the United States – think “San Francisco,” for example – cannot persuade the thoughtful reader that this new ceiling helps the poor.  Nor will it really support the middle class and rich.  Here’s why.

While the first wave of defaults came from unaffordable and recklessly structured sub-prime mortgages that couldn’t withstand sudden sobriety in housing markets, the second wave is likely to be caused by the combination of continued job losses, soft real-estate markets, and yet more loans with paltry down-payments.  These new required minimums are almost worse than the new maximum the government is willing to insure.  Qualified homebuyers can now put down as little as 3.5% of the cost – for the price of a 1.75% premium on the loan for the other 96.5%.  Some who can afford a more substantial down payment are choosing to pay the bare minimum, take on larger (and sometimes huge) carrying costs, and bet on the stock market with the rest of their savings. But employment figures are not expected to improve for some time, and real estate is considered a lagging indicator: it’s not supposed to recover until well after unemployment recedes from its staggering double-digit levels. If they lose their jobs, new borrowers may be unable to continue premium-plus monthly payments on mortgages up to almost three quarters of a million dollars in size.  Soft markets may make them unwilling to continue, even if they could.  A slight decline in regional housing markets puts these new homeowners well under water – with only 3.6% down, on day one the 6% real-estate agent’s fee alone already made their homes worth less than their mortgages.

More than one in six FHA borrowers is already delinquent in monthly payments, and yet this government agency continues to underwrite mortgages at a rate four times higher than three years ago. The size of the mortgages FHA is now authorized to insure will only aggravate the depletion of its reserves when the big ones go into default. FHA insurance was supposed to help minority and low-income families who lacked the savings for the 20% down-payment banks used to require.  No one getting insurance for a $700,000 mortgage is poor.  Yet.

Almost one in ten homeowners with mortgages were at least one payment behind in the third quarter of 2009. Up from one in fourteen a year earlier, the delinquency rate is the highest since the Mortgage Bankers Association began keeping records in 1972.  And we’re just talking delinquencies here.  Add foreclosures and the number rises to one in seven. The problem is most pervasive in four states: Arizona, California, Florida, and Nevada. In the Sunshine State, 25% of mortgage holders are behind in their payments.  Overall, foreclosures are expected to continue to rise, peaking only in 2011.

Chairman Barney Frank is still playing the game that got the world into its current financial mess; moreover he is raising the stakes. Now government policies encourage unaffordable housing for almost all income levels while federal support for affordable rentals lags.  Ironically, NHTF coffers were supposed to be filled by Fannie Mae and Freddie Mac, but following Congressional dictates for degraded lending standards got them into so much trouble that they too are on the dole, not donors but recipients of government or quasi-government funds.  These, too, were policies endorsed by Chairman Frank and his Congressional allies.

It looks like Frank doesn’t extend the value of his power ”to significantly increase capital requirements” from big banks to mortgage markets.  And what happened to his belief that “pushing people into homeownership who cannot afford it” and “excessive emphasis on homeownership” were responsible for our recession?  Maybe Capitol Hill, like a Las Vegas Casino, can be too intoxicating even for veteran gamblers.  Like many risk-takers before them, Frank and like-minded Members of Congress just can’t resist giving the roulette wheel another spin.  If only they were playing with their own money, and not ours.