Last week, former Treasury Secretary Larry Summers blasted the Biden administration’s new “guidelines” on mergers and acquisitions, referring to them as “almost like a war on business.” The administration’s new approach seeks to guard against “unchecked consolidation” among private firms, supposedly because it “threatens the free and fair markets.”
But setting aside Treasury Secretary Yellen’s conflicting comments on bank mergers, as well as the built-in bias toward consolidation that comes from regulating banks based on financial stability, the move isn’t really much of a shock. It fits nicely with the administration’s broader efforts, including its (futile) attempt in 2021 to link various economic problems to increased consolidation “across healthcare, financial services, agriculture and more.”
What’s even less surprising, though, is that the administration remained silent about concentration in the housing finance market. That level of concentration has been rising for most of the post-WWII era, but neither Congress nor the White House does much about it because the increasing concentration is now within the federal government, not the private sector.
And it’s only gotten worse since the 2008 financial crisis.
As of December 31, 2022, Fannie and Freddie – both of which have remained in government conservatorship since 2008 – had combined total assets of $7.5 trillion, representing 49 percent of the nation’s outstanding residential mortgage debt. From 2008 to 2022, the Federal Housing Administration’s annual market share of purchase loans ranged from 14.14 percent to 32.6 percent. (See Table 3.)
According to SIFMA data, from 2008 to 2021 (the most recent year available), the combined federal share of the mortgage-backed securities market (for Fannie, Freddie and Ginnie Mae) averaged 81 percent per year, coming in at 88 percent in both 2020 and 2021. (The share is for single family and multifamily combined.) And, of course, during this same period, the Federal Reserve went from holding zero MBS to more than $2.5 trillion.
Yet the homeownership rate has not sustainably expanded, and it currently rests almost exactly where it was at the end of the 1970s. The overall U.S. homeownership rate is below average among developed nations, and volatility of home prices and home construction in the United States were among the highest in the industrialized world from 1998 to 2009.
Federal policies have always tended to make it easier to get a mortgage (especially through lower downpayments), thus driving debt and home prices higher. This approach directly conflicts with making housing more affordable, so it’s not surprising that home prices have now risen to 63 percent more than where they peaked prior to their 2007 crash.
Based on recent history, though, even an attempt to gently slow down federal demand-side policies would be met with fierce opposition. A proposal to increase the FHA’s minimum downpayment from 3.5 percent to 5 percent, for example, would go nowhere in Congress.
Still, if the Biden administration wants to increase competition in the housing finance market, it has multiple options.
Perhaps the least controversial would be for the Federal Housing Finance Agency to promulgate a rule to enforce the “excessive use” provisions in Fannie’s and Freddie’s charters. Specifically, section 304(a)(2) of Fannie Mae’s charter stipulates that its secondary market operations “should be conducted on such terms as will reasonably prevent excessive use of the corporation’s facilities.” Section 305 of Freddie’s charter includes virtually identical language.
Yet, no federal rule or regulation exists, and excessive use remains undefined.
Congress clearly intended that Fannie and Freddie support the secondary mortgage market rather than dominate it. But a private market barely exists, so it’s difficult to see how the current market structure doesn’t violate the charters, much less how the FHFA could possibly be enforcing the provision.
If the administration truly believes in the rule of law, and that “Competitive markets and economic opportunity go hand in hand,” it will propose a rule and rectify this situation.