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Treasury Doubling Down on Financial Crisis Mistakes?

peter-j-wallisonFormer White House Counsel and Senior Fellow in Financial Policy Studies at the American Enterprise Institute Peter J. Wallison put in an appearance Thursday on CNBC’s The Santelli Exchange, where he criticized the U.S. Treasury Department’s recent approach to regulation of the housing market and the government-sponsored enterprises, Fannie Mae and Freddie Mac.

Wallison, who will be discussing key topics such as GSE and housing reform as a keynote speaker at the 2018 Five Star Government Forumhas had the Treasury in his crosshairs in several recent Wall Street Journal op-eds, including a January piece entitled “A Rogue Treasury Department Turns Toward the 1930s.” During his Santelli Exchange appearance, Wallison echoed many of the concerns he voiced in that piece, expressing confusion that the Treasury Department seems to be veering away from the Trump administration’s overall focus on deregulation. “The Treasury Department … should be leading the charge on deregulation,” said Wallison, “and, in the area of housing, they are not. They’re going to work with Congress on a new program that will have government guarantees of mortgage-backed securities. That’s exactly the wrong way to go. What we have done in the past has failed. It has made mortgages and homes more expensive for people, especially low- and moderate-income people.”

Wallison addressed recent discussions of GSE reform, citing a recent plan by the Federal Housing Finance Agency, which regulates Fannie and Freddie, that would increase regulation over those enterprises. As described by Wallison in his Wall Street Journal piece, the FHFA plan would turn Fannie and Freddie into “privately owned utilities” with regulated rates that would help ensure a “fair return” to shareholders. Both GSEs would issue mortgage-backed securities covered by a government guarantee that would, according to the FHFA proposal, “attract and retain shareholders while also supporting broad liquidity in the single-family and multifamily housing finance market with affordable mortgage rates.”

The plan would also, according to Wallison, allow the successors to Fannie and Freddie to have “a lower rate of return on purchases serving low-income and moderate-income borrowers,” theoretically so that “all taxpayers can share in the benefits of federal support for the housing finance market.” However, both in his Santelli Exchange appearance and in his Wall Street Journal piece, Wallison argues that a focus on government-backed affordable housing initiatives led directly to the 2008 financial crisis by reducing Fannie and Freddie’s underwriting standards so they could hit quotas for low- and moderate-income mortgages, leading to a flood of subprime mortgages that eventually destabilized the housing market.

Noting President Trump’s frequent criticisms of the Dodd-Frank act and calls for its repeal, Wallison criticized the Treasury Department for seemingly “going in the opposite direction” and working to “increase the power of the Financial Stability Oversight Council, which is at the heart of the Dodd-Frank Act.”

In his January Wall Street Journal piece, Wallison put it succinctly: “The trouble here is not merely that the Treasury is an outlier in what was supposed to be a deregulatory administration. It is also that the department’s current custodians appear to have learned nothing from the financial crisis, which was caused by precisely the policies they now support.”

“The concept of strategically important financial institutions being ‘too big to fail’ has failed," said Five Star Institute President and CEO Ed Delgado when asked for comment. "It is time for the government to learn the lessons of the financial crisis and refocus policy toward housing, GSE, and regulatory reform that achieves real, positive change without repeating the mistakes of the past.”

Click here for more information and to register for the 2018 Five Star Government Forum, April 3 in Washington D.C.

About Author: David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@theMReport.com.

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