Two weeks into his new gig as a senior fellow at Harvard University’s Joint Center for Housing Studies, Donald Layton, who was the CEO of Freddie Mac until the end of June, is speaking out – in favor of regulation.
The title of Layton’s first major paper since joining Harvard is: “Why is the administration not talking about utility-style regulation of g-fees?” The so-called g-fees, or guarantee fees, are intended to cover the credit risk and other costs that Fannie Mae and Freddie Mac incur when they back mortgages from lenders and result in higher mortgage rates for borrowers.
Layton is even divulging comments he heard in private meetings with U.S. Treasury officials, albeit without naming names. Addressing the topic of creating competition for Freddie Mac and its larger competitor Fannie Mae, Layton wrote that unnamed Treasury officials “talked in some meetings I attended of setting up mechanisms to allow additional firms to enter as easily as possible, but of course knew it could not be forced or guaranteed.”
Layton also cites the public positions taken by the Trump administration, including Trump’s appointed head of the Federal Housing Finance Agency, Mark Calabria, before chiming in to endorse another approach that has been bandied around: Treat Fannie and Freddie, known as government-sponsored enterprises, or GSEs, as utilities.
“Some observers of GSE reform have suggested treating them like utilities, such as a local electric or water utility,” Layton writes. That approach with other companies “has worked adequately (if not perfectly) throughout the United States for about a century now. To me, that classifies as tried and true!”
That would avoid the possibility of the two mortgage giants engaging in price-fixing, he argues.
“Having just two competitors in such a situation is ripe for the evolution of implicit collusion (also known as tacit collusion),” he wrote. “The two GSEs, if privatized again, would be ripe to engage in just such price-setting implicit collusion, with the possible risk of g-fees being materially higher than they need to be.”
If the GSEs at some point have additional competition from other mortgage companies, the utility-style approach could be changed, Layton said.
It “can always be dropped later if there is an evolution where two or three additional GSEs enter the business successfully,” he wrote. “But until then, let’s adopt the tried-and-true utility regulation approach to setting g-fees to avoid unfortunate and undesirable implicit collusion, the unintended consequence of which could be unnecessarily high g-fees.”
Harvard’s new senior fellow also brought up the question of whether the GSEs engaged in price-fixing before being seized by the government in 2008. Layton opined that they likely did in some ways, and called them “lazy competitors.”
“Now, you might ask: before the companies went into conservatorship, did they implicitly collude? There is some general belief in the industry that they did, although seemingly less to set g-fees at high levels (they were very low, compared to where they are today) and more to support a market split (averaging 38 to 40% for Freddie Mac, the rest for Fannie Mae), which allowed them to be… well… lazy competitors. What I have found is an almost universal belief that g-fees were set, at that time, more on a political basis than an economic one (i.e., to be as low as possible), and that the companies fed their need for a rising stock price via increased revenues and profits not from g-fees but from their subsidized investment portfolios, which became astoundingly large and ever-growing.”
