Some in the industry have initiated a charge to eliminate Fannie Mae and Freddie Mac and take over the mortgage industry—and at the forefront of that charge is a group of high-level industry professionals that has moved back and forth between the public and private sectors since the housing crisis in 2008, according to a report from the New York Times by Gretchen Morgenson on Monday morning.
The Times conducted an investigation of “lobbying records, legal filings, and internal emails and memorandums, as well as housing officials’ calendars and White House and Treasury visitor logs” that documented the big banks’ quiet push to remove the two giant government-sponsored enterprises and grab their share of a residential mortgage market that totals about $5.7 trillion—suggesting a conflict of interest perpetrated by some of the country’s foremost and high-profile housing policy specialists who were instrumental in proposing a series of recommendations to wind down Fannie Mae and Freddie Mac.
Michael Berman, who served as Chairman of the Mortgage Bankers’ Association from October 2010 to October 2011 and then later worked as a Senior Adviser to then-HUD Secretary Shaun Donovan from November 2012 to December 2013, has led that charge, according to the New York Times. Berman subsequently recruited David Stevens, a former HUD Assistant Secretary and Federal Housing Administration Commissioner, to serve as President and CEO of the Mortgage Bankers Association.
Stakeholders in the mortgage industry question whether or not a takeover by Wall Street banks would help the industry. Some say not only would it not help the industry, but it would be harmful. According to the New York Times:
“For all the problems associated with Fannie and Freddie, some housing experts say, allowing the nation’s largest banks to assume greater control of the mortgage market would most likely increase costs for borrowers. It would also reduce participation and competition from smaller lenders, and could imperil taxpayers because of the potential for even greater bailouts for financial institutions that Washington considers too important to be allowed to fail.”
Fannie Mae and Freddie Mac required a combined $187.5 taxpayer bailout in 2008 when the nation’s housing system collapsed, at which time they were seized by the government and placed in conservatorship of the Federal Housing Finance Agency. Soon after the bailout, Berman—who at the time was the vice chairman of commercial real estate lender and management firm CW Capital—was chosen to lead the charge to privatize the nation’s housing finance system, which in 2008 was in disarray, according to the Times.
The Obama Administration’s answer to the problem of the broken home finance system was to replace Fannie Mae and Freddie Mac with new mortgage guarantors backed by private capital. Berman created a council that was largely comprised of large banks and mortgage insurers, the Times reported.
Stevens, as the Commissioner of FHA at the time, was a principal figure in these council meetings and discussions, the Times reported. Advocates of low-income housing and borrowers expressed concern that the policies being developed were more favorable toward the big banks, according to the Times. After two-and-a-half years of meetings and discussions, the Administration presented its options for housing finance reform in February 2011—but whatever they decided, it was clear that Fannie Mae and Freddie Mac had to go, and the policymakers decided they would work with the GSEs’ conservator, the FHFA, to wind them down.
“The policy to eliminate Fannie and Freddie was a page out of the mortgage bankers’ playbook. And like the authors of that plan, the administration emphasized that taxpayers would be protected and that a new, level playing field would benefit all participants in the housing market.
“In private, however, officials cited another group of beneficiaries under the plan: big banks.
“An internal Treasury memo written on Jan. 4, 2011, to Mr. Geithner by one of his top deputies characterized the administration’s first option to wind down Fannie and Freddie as ‘a bank-centric model” that “benefits larger institutions’ with the capacity to hold mortgages on their books.”
In March 2011, about a month after the Administration issued its recommendations, Stevens became President and CEO of the MBA. The New York Times also cited Jim Parrott, currently a research fellow at the Urban Institute, as another former HUD official who has worked on housing finance policy and has consulted for organizations that stand to benefit financially from the elimination of Fannie Mae and Freddie Mac. Parrott served an advisor to Donovan from July 2009 to December 2010, after which he led housing finance policy at the National Economic Council at the White House until January 2013, according to the Times.
The Times investigation revealed several logs that showed that Berman, Stevens, and Parrott all worked on housing finance policy after they left their government positions. Many have questioned whether such a “revolving door” between the private and public sectors when it comes to housing finance policy is ethical, or even legal. The U.S. Office of Government Ethics states: “Two of the restrictions may affect any former ‘employee,’ regardless of rank or position. The restrictions bar a former employee from representing another person or entity by making a communication to or appearance before a Federal department, agency, or court concerning the same ‘particular matter involving specific parties’ (e.g., the same contract or grant) with which the former employee was involved while serving the Government. If the matter was pending under the employee’s official responsibility during the employee’s last year of Government service, the bar lasts for two years. If the employee participated in the matter ‘personally and substantially,’ the bar is permanent.”
The Times report included this statement from Richard W. Painter, a law professor at the University of Minnesota and former chief ethics lawyer at the White House under President George W. Bush:
“With respect to Stevens, Parrott and probably Berman, it appears that these officials participated personally and substantially in the administration’s decisions about resolving the financial difficulties of Fannie and Freddie,” Mr. Painter said. “This means that they each have a lifetime ban on representing back to the United States government on either of these two particular party matters involving Fannie and Freddie.”
Berman and Parrott claimed they did not advocate for their clients during any of the meetings discussing housing policy, the Times reported.
“In the interview, Mr. Berman said he kept working on the project with administration officials not as an advocate but because of his ‘contacts and granular knowledge of what was going on.’
“Mr. Parrott also said his meetings did not involve advocacy on behalf of his clients. ‘I give them a sense of how people are thinking and how things are likely going to develop in their world,’ he said.”
The MBA reacted angrily to the New York Times story, posting the following statement on its website:
“This story lacks substance and merit and thus is completely pointless. MBA advocates tirelessly on behalf of all of its members, both large and small, who represent the entire real-estate finance industry. At no point during David Stevens' tenure in the government and now as president and CEO of the Mortgage Bankers Association, did he ever violate any ethics statute.”
Stevens responded to the Times story in a blogpost on MBA's website, stating: “Let me say emphatically and categorically — I took great care to adhere to all ethics rules and have never done anything unlawful. Every step of the way, from the moment I was first contacted by MBA through today, I have worked closely with lawyers at HUD and continued to consult with counsel while at MBA to make sure every action I took did not even approach the ethical or legal line. At every turn, I erred on the side of caution.”
Bill Cosgrove, CMB, immediate past chairman of the MBA and President & CEO of Union Home Mortgage, Strongsville, Ohio, stated: “MBA, and Dave Stevens in particular, have been staunch advocates for small lenders and the allegations in this storybook view could not be further from the truth. As the owner of a small independent mortgage bank, and having been involved in MBA leadership for over a decade, I have watched as MBA consistently fights on behalf of all of its members, regardless of size or business model.”
Tim Pagliara, founder and chairman of Investors Unite, a coalition of more than 1,100 Fannie Mae and Freddie Mac investors, told DS News: “I’m not surprised. A lot of the movement to shut down the GSEs has been, on one level, irrational. There’s been a lot written about it. I think when you follow the money and the conflicts emerge, you see that it has less to do with policy than it does to do with the greed and arrogance of those that are trying to push their narrative.”