One year ago today, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Despite the “Wall Street” moniker, the tentacles of Dodd-Frank’s 2,315 pages and hundreds of pending rules reach across many American streets to many types of businesses, from manufacturers that use derivatives to hedge inflation and interest rates, to small stores that extend credit through layaway plans.
Ironically, about the only two firms Dodd-Frank doesn’t touch are the two most responsible for the crisis: the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. In their new book, Reckless Endangerment, New York Times financial columnist Gretchen Morgenson and market analyst Joshua Rosner write that Fannie “led both the private and public sectors down a path that led directly to the financial crisis of 2008.” At the end of the book, the authors note with dismay, as have many conservative critics, that the law doesn’t lay a glove on Fannie and Freddie.
GSE reform is coming, promises the Obama administration. In an op-ed
yesterday in the Wall Street Journal
, which largely consisted of blasting Republicans for efforts to lessen Dodd-Frank’s impact, Treasury Secretary Timothy Geithner proclaimed, “We have started the process of winding down Fannie Mae and Freddie Mac and reforming the overall mortgage market.”
Yet Fannie and Freddie are bigger than ever, securitizing nine out of ten home mortgages and receiving unlimited guarantees from the taxpayer, thanks to the Obama administration’s Christmas Eve bailout of 2009. And one provision of Dodd-Frank has not only slowed the momentum of reforming the GSEs, but threatens to make them even bigger.
Dodd-Frank’s rules on “qualified residential mortgages” — as currently proposed in a joint regulation by banking agencies, the Department of Housing and Urban Development, and the Securities and Exchange Commission — aggrandize the GSEs by putting shackles on their private-sector competitors. The regulation sets overly strict rules for down payments for mortgages to be securitized, but then exempts from these requirements any home loan insured by the Federal Housing Administration or purchased by Fannie or Freddie.
The rules from Dodd-Frank’s section 941 are a multi-step process. They start with a requirement that firms originating mortgage loans retain 5 percent of the risk on their books. Because this requirement would price out many small financial institutions — the American Enterprise Institute’s Peter Wallison has written that such risk “can only be carried by a securitizer that has a substantial balance sheet” — the law creates various exemptions.