Gary Miller Has a Plan: Heads I Win, Tails You Lose

Rep. Gary Miller has a plan, Wall Street investors and banks will provide money for you to buy a home, when you pay your mortgage they collect the interest payments and earn a profit. If you don’t pay your mortgage though, and they suffer a high amount of losses, then you and your neighbor both chip in to cover their losses so that they get their invested money back. Sounds like a great deal, no?

That is the simple essence of the new Miller-Carolyn McCarthy legislation to be proposed in the House of Representatives this week.

Their reported plan is to merge Fannie Mae and Freddie Mac (GSEs) into one company that would purchase mortgages from private originators, securitize them, slap a taxpayer-backed guarantee of payment on them, and then sell them to investors.

If that sounds familiar it’s because that is pretty much what Fannie and Freddie do now.

The difference is that the new company would not be shareholder-owned, and would be run like a public power utility, with business practices and prices set by regulators. The GSEs were (and technically still are) owned by shareholders so they had to serve two masters, meeting affordable housing and other government goals while also trying to make substantive profits for its owners. By getting rid of one half of the equation, Miller is seeking to ensure the GSEs are responsible organizations that don’t fall into the same pitfalls as before.

But because the organization will be tightly regulated by the Federal Housing Finance Agency, and exists with the public policy goal of promoting homeownership, the organization will be just as susceptible to influence from Congress, the White House, and special interest groups as Fannie and Freddie were. If homeowership rates are not what the public wants, politicians will seek to appease them by pushing the singular GSE to lower standards and increase support for mortgages. Eventually someone else will repeat Barney Frank’s famous line about wanting to “roll the dice” with Fannie and Freddie in hopes of a political win.

Beyond this, there is a more fundamental question as to why a Miller GSE would even need to exist. His plan is to fund the new organization by charging “guarantee fees” on banks and investors—no taxpayer money up front. Those fees will also form an insurance fund in hopes that taxpayers wlll not have to cover small losses for investors—no taxpayer money up front.

So why even have the government involved? Why not let a private company charge a fee to insure payment. We have companies that can do that. Entreprenuers can start more.

The fear is what happens in a catastrophic scenario. When the losses are too high for private companies to handle. In that case, the Miller GSE will tap public money, taxpayer dollars, to give it to investors so that they don’t take losses.

It is not investing, it is buying a $20 bill with a $10—a scam that stopped working when we were kids at a pretty early age.

Seeing the flaws in this does require some long-term thinking, but just consider the incentives. If a financial institution is going to invest a small amount and suffer a small amount of losses then the privately funded insurance fund, its own money, will cover it. But if the company invests a very large sum, and suffers huge losses along with others in the industry, they the upside is huge earnings and the downside is taxpayers cover the losses.

Why are investor losses covered at all by taxpayers? Why are we taking the risk? Shouldn’t investing come with some sense of risk? Do taxpayers have a stop gap when they put their money in the stock market? No. So why do professionals, who are paid to look a the risks, analyze the possibility of gains or losses, have a taxpayer funded support system? (See these 10 arguments against a government guarantee.)

Ultimately, this comes down to a question of whether or not the U.S. government wants to make homeownership a public policy goal. If subsidizing Americans so they can buy a home is what the government wants to do, then a system like this will be necessary. But if we can step back a minute and rethink homeownership, we can ask why subsidizing people to buy a home should be a public policy goal in the first place: it doesn’t actually create wealth over time and renting can be just as fiscally responsible as being a homeowner. Rethinking homeownership very quickly makes the need for a GSE.