There’s little good to be said about the prolonged government shut-down, but at least the employees so adversely affected by it can be recalled to handle crises.  If U.S. housing finance falters, who you gonna call?  Thursday’s resignation of Ginnie Mae acting head Michael Bright completes the hollowing out of every top-level U.S. Government and GSE executive who, in a housing-finance crisis, could act with the dispatch and decisiveness outside the reach of junior officeholders, hold-overs, and temporary assignees no matter how expert.  We learned the hard way in 2008 that the ultimate bulwark against systemic catastrophe is a team of experienced decision-makers who worked cooperatively across political, party, and agency lines to craft a rescue plan.  With Ginnie Mae issuing over $2 trillion, the GSEs’ outstanding obligations clocking in at $4.6 trillion, Home Loan Bank debt standing at $1 trillion, and the U.S. economy dependent on all of them, even a small housing-finance scratch could spark a systemic crisis if no one knows how to staunch the bleeding.

How bad is the leadership vacuum? Ginnie Mae, FHA, and VA are part of the ever-troubled and now wholly-dysfunctional Department of Housing and Urban Development.  Secretary Carson is a hard man to find and an uncertain voice on substantive housing policy.  The deputy secretary just quit and the FHA commissioner is now the deputy secretary.  The Federal Housing Finance Agency presides over the GSEs and FHLBs.  Its director’s term just ran out and the Comptroller of the Currency has stepped in as head of the agency pending confirmation of Vice President Pence’s economist, Mark Calabria.  The GSEs have vacancies in their corner offices, with only the Home Loan Banks – the smallest of all of these agencies – at least under longstanding management, if not a confirmed regulator.

There are three ways top-personnel vacancies could spell serious trouble:  one is of slow death with dangerous macroeconomic consequences, the second is a sudden spasm with immediate crisis consequences, and the third is damage to housing finance that makes the U.S. still less equal and thus more crisis-prone.

The slow-death scenario may already be upon us with Ginnie Mae.  Its $2 trillion of full-faith-and-credit MBS is underpinned by increasing risks at FHA and VA that investors are already beginning to take into account as they price the MBS they buy.  The more cautious the investor, the higher national mortgage costs and the weaker the housing market.  Investors may price prepayment and other risks more cautiously than before, but they need not worry about credit-risk protection from the federal government – or I hope not.  The same is true of the GSEs and Home Loan Banks from a high-level perspective.  Their obligations have an “effective” or implicit guarantee likely to bring the taxpayer to the rescue no matter what. 

How much the deficit then would rise and how grave the resulting damage to long-term growth and economic equality is another matter and, to say the least, not a small one.  But, assume as I think we must that the Trump administration and Congress stand behind full-faith, effective, and even implicit taxpayer guarantees.  Stress ill-handled will be housing-finance strain across the global system that is ultimately resolved by the U.S. taxpayer. 

This is bad enough, but not as bad as the second systemic-risk scenario.  An increasing number of U.S. mortgage lenders have become so accustomed to an uninterrupted securitization stream through these government and government-like entities that even a blip is likely to create significant liquidity risk and, then, insolvency.  Even if this doesn’t occur, efforts by the U.S. Government to recover what’s owed to it from mortgage lenders, especially those without set-aside capital or liquidity, could bankrupt lenders and add to taxpayer cost.  Tens of millions of under-water homeowners and house foreclosures are, to say the least, also not a good thing.

The worst risk, perhaps unsurprisingly, is to be found under Ginnie Mae’s full-faith-and-credit umbrella at the FHA and VA.  FHA offers lenders a 100% guarantee, which means that they can shovel anything its way.  VA only guarantees up to fifty percent, but lenders have to have capital at risk to care about coming up with the extra cash.  In both cases, incentives align with risk-taking, not sustained homeownership.

Since the crisis, ultra-low rates have turned FHA and VA into refinancing engines – an activity that by definition assists only existing – not first-time – homeowners.  Refis into lower-rate loans do make homes more affordable, but only if the refi is sustainable and not a cash-out transaction that turns a home into the ATM that exposed so many vulnerable households to so much foreclosure risk prior to 2008.  At FHA, cash-out refis have soared to their highest level ever even as overall refi volume dropped in 2017.  Over a third of total refis were from conventional into FHA loans, signaling that home equity was likely far lower than it was before the refi even if no cash was taken out.  Borrowers across the board at FHA also have lower scores and higher debt-to-income ratios than ever before.  The FHA commissioner has also made it clear that his agency’s systems are so outmoded that it may not even know where its risks lie or where its lenders are to be found.

FHA risk is bad enough, but VA loans comprise a third of Ginnie’s book.  Mr. Bright called many VA lenders “refi churns,” and the VA’s loans show how true – and how risky – this is.  Fees involved in VA cash-out refis mean that, whatever lower rate might apply to a loan, the actual cost of the mortgage is higher because of VA and broker fees.  Ginnie sought to ensure that all VA refis gave borrowers a truly lower rate, but Congress caved when it came time to give the agency this authority.  EGRRCPA in 2018 determined that borrowers get enough benefit from a VA mortgage if they just get the cash.  In September, cash-out refis were 86 percent of total VA refis, up from just thirty percent in 2016.  Now, rates are up, the economy is slowing, and house prices have likely plateaued.  With no or even negative equity, many VA borrowers will look for the cash button on their house but get nothing but a delinquency notice.

Which brings me back to economic inequality.  As a blog post we issued earlier this week demonstrated, the less equal a nation, the greater its financial-crisis risk.  A slow-death of U.S. housing agencies into higher-cost, uncertain securitizers is one way to make housing finance still less affordable.  A sudden crisis compounds that risk with extreme danger to the most vulnerable households and thus to what’s left of their hope for economic advancement.

That so many trillions of taxpayer wealth and so many trillions more of homeowner investment and financial-system risk depend on so few experienced, confirmed regulators is a testament to how dysfunctional the federal appointment process has become. Would temporary appointees with no detailed knowledge of their agencies be able to communicate to a Cabinet rife with dissent or to a President prone to conspiracy theories, not constructive intervention?  Would the 116th Congress rise to bipartisan action on politically-risky measures as the 110th in 2008 ultimately managed to enact the TARP?  Will the federal government ever get back to work?  Who knows.