The Dodd-Frank Act turns two this month. The economy is still slow. A recovery remains elusive. The cure to the housing mess remains a mystery.
When U.S. Rep. Barney Frank, D-Mass., leaves office this year, it will mean the law’s two architects will no longer be in Washington. Former Sen. Chris Dodd, D-Conn., went to Hollywood to become chairman of the Motion Picture Association of America after his retirement from his three decades in Washington. Frank, who will have spent 33 years in Congress when he retires in 2013, will lecture and begin a writing career. Both have let go of the kite string to see where powerful lobbying groups, a sharply divided Congress and poorly funded regulators take the reform.
Frank, as free-wheeling and roundabout as ever, claims the Dodd-Frank Act was only part of the master plan. The 2010 election, he claims, gave rise to a gridlocked legislative body that interrupted the momentum of change.
For better or worse, he leaves confident in the very market that has come to vilify him. He believes Wall Street will one day “get over it.”
HousingWire: So, it’s been two years since Dodd-Frank passed. What do you think of the progress so far?
Barney Frank: Well, the Republicans have denied adequate funding for two agencies that get new authority under this bill, the Commodity Futures Trading Commission in particular, which has been starved by them, and the Securities & Exchange Commission to a lesser extent. You’re talking about trillions of dollars in derivatives here. The CFTC budget is tiny. That’s been very frustrating for me.
HW: Did you anticipate this sort of push back from the mortgage industry in particular?
Frank: Oh, sure. No one likes to have their profits cut back. On the question of risk retention, I think that is one of the important features of the bill, and I’m hopeful there will be no backing down on that. I guess I was a little surprised they would defend the right to make a loan without having to stand behind them. That was so clearly one of the precipitating causes of the crisis, and I was disappointed in that.
HW: Has the pendulum swung too far, though? Will a 20% down payment on the qualified residential mortgage restrict lending too much?
Frank: They’re not talking about 20% anymore. And that’s assuming that securitization is necessary to make loans. We used to make loans without securitizations. And also they must not think they’re making good loans if they can’t hold 5%. I think 20% is high, but it has to be. But they aren’t saying you can’t make a loan. They’re saying if you make the loan you’ll have to retain 5% of the loss. Do they have so little confidence in their judgments that that’s fatal to them?
HW: But does that push too much business to the banks that are large enough to be able to hold that kind of capital?
Frank: No. Again, why is risk retention such a terrible thing? What you’re telling me is that these people have no confidence in the loans they make.
HW: Without such a broad securitization market, can the housing market return back to what it was before the overheated bubble?
Frank: Well, it used to be pretty robust without securitization at all. And these bad loans just didn’t start in 2005. Again, you’re assuming there is no securitization with risk retention. I have more confidence in the market than that. There will be a little bit of a bump. But again, we’re saying if you make those loans, you should stand behind them. I’m shocked at this notion that they have so little confidence in the loans they make that they can’t keep even 5% of the risk. And I think that they’ll get over it when the demand is there.
HW: Ok. So, what have you learned from the homeownership policies of the past?
Frank: Well, I’ve always been critical of the policies of the past even with Fannie Mae and Freddie Mac. I’ve always been pushing for rental housing. I’ve always been an advocate for rental housing for most low-income people. I think there’s kind of a cultural bias that homeownership is better. And that simply isn’t true. I’ve been reinforcing the case that renting for low-income people should be their first choice.
HW: Should we then change what we say about what Americans want when it comes to housing?
Frank: People will want what they want. I don’t control what people want. But I do think that we should be more realistic about what people can afford and the constraints that they have.
HW: What do you think is going to happen to Fannie and Freddie?
Frank: That’s an interesting issue. I just noticed an article by (Rep. Scott Garrett, R-N.J.) complaining that the financial reform bill of 2010 didn’t have anything about Fannie and Freddie. He’s been chairman of the subcommittee that has jurisdiction over Fannie and Freddie since January 2011, but he hasn’t moved anything out of his subcommittee. He hadn’t taken anything up to the full committee. The Republicans, when they’re out of power, they complain about Fannie and Freddie, and when they’re in power, they never do anything about it.
And the reason is this: They’re split. There’s a strong ideological wing of the Republican party that says we should just abolish Fannie and Freddie with no guarantees, just let the market do everything on its own. Very few people connected to housing think that would work — the Realtors, homebuilders, mortgage bankers. So there is a majority for replacement.
I mean, Fannie and Freddie should be abolished. You shouldn’t have this shareholder-public thing. That clearly, in retrospect, was a problem. But I think some form of ultimate federal government guarantee is an important thing if you’re gong to have 30-year, fixed-rate mortgage. It could be self-funded, I think.
But Republicans don’t have a majority for what they would like to do, so they’re frozen. They’re not willing to accept what’s necessary. As long as Republicans are in control of the House, nothing will happen, unfortunately.
HW: Following that logic, say the Democrats take back the House in November …
Frank: Then you would see something like Option 3 that Geithner outlined, which got significant Republican support from some like John Campbell from California and others.
HW: You said once in a committee hearing that you would like to see the Campbell-Peters bill proposal taken up.
Frank: Some like that proposal, and I think it’s something close to what the administration wants, and there’s a clear majority for it in the committee in the House. But it goes counter to the very right-wing ideology of the House, and they block it from coming up.
HW: Why wasn’t GSE reform included then in 2010 (In Dodd-Frank)?
Frank: We started GSE reform in 2008. We put them into conservatorship. They were different to the other financial reform piece. If we were in power, then we would have continued working on it.
HW: Did you expect conservatorship to last this long?
Frank: No, we didn’t think the Republicans would take over and refuse to do anything.
HW: Well, still, why wasn’t an endgame put in place in Dodd-Frank in case nothing was done?
Frank: It was a separate issue, not directly related. Plus, people were already complaining there was too much already in there. They were already saying it was too complicated. You know, frankly, we just did not have the energy to focus on it. Because, you know, housing finance is a separate issue from the other financial reforms we did. We took a major step in putting them into conservatorship to stop the bleeding. The GSEs were also performing an important function of the housing market during some tough economic times.
We had a plan. The first thing we would do was put them into conservatorship, stop the bleeding. Then we did the financial reform. Then we were going to go back and figure out what would be replacing Fannie and Freddie in terms of housing finance. That was our agenda. I wanted to introduce something in December 2010, during the lame duck, but the Republicans took over.
We would have simply abolished Fannie and Freddie, and there would have been some sort of guarantee that people could buy for the 30-year FRM.
HW: Even with Dodd-Frank, are you concerned that the regulators you put in place to oversee the system won’t catch the next disaster in time?
Frank: No. But these things take time. You have to get comments and work through it. I think we have made it very, very unlikely that anything could happen like what happened before. Now, 10, 15, 20 years from now there will be new things that need to be dealt with.
But I would cite for you the JPMorgan Chase thing. If the JPMorgan Chase losses had occurred five years ago, that would have caused some panic. But the banks are better capitalized now. People have more confidence in the system now.
We were never trying to avoid losses at a financial institution. What we were trying to do is that if there were losses at a financial institution that we wanted to be sure it wouldn’t spill over to the rest of the economy. I think the JPMorgan Chase example shows that we have done that.
HW: The largest banks are growing. The smaller banks say they’re being pushed out. Are you comfortable with Dodd-Frank pushing more business to the largest firms?
Frank: They’re not being pushed out by anything. The bill favors small banks over the larger ones. It would just be market forces. We changed the deposit insurance premiums to favor small banks over large banks.
HW: But do you at least understand when they complain the costs are too high for them?
Frank: No, because there aren’t any real costs in the bill. The only thing that somebody can complain about is that we stopped some of the mortgages they wanted to write. But this imposes no new costs on them. There are no new regulations that are imposed on community banks. I asked for what specifics they have, and they never have any.
HW: What about risk retention? The 5% they would have to hold.
Frank: Oh, if that’s the one they’re complaining about, then fine. If the alternative is letting people make loans and having no responsibility for them, then that is a cost we should have to pay. The practice of making loans when you didn’t have any responsibility for whether or not they would be repaid was so central to this crisis that I really am surprised that people really want to keep doing that.
HW: Well, then, once these rules are in place, can you really ensure that taxpayers will not be needed to bail out the housing industry again?
Frank: Yeah. Why would they have to bail it out? There would be no Fannie and Freddie anymore. As a matter of fact, the business Fannie and Freddie has done since 2008 has broken even, maybe even broken a profit. And as far as housing is concerned, when we talk about abolishing Fannie and Freddie and having a guarantee paid for by the people who did it.
I assume there would be some possibility that the Federal Housing Administration would have some bad loans. There’s no guarantee the FHA would never have to get taxpayer money, but I think we made it very unlikely.
HW: Where do you think most of the risk will be taken in the future?
Frank: I don’t know. That’s up to the market. There’s this dilemma, they say, that this is the way we’ve done it and we can’t change it. I think the market is more flexible and more adaptable than the people in the market seem to think.
HW: What do you plan to do during retirement?
Frank: I’ll be giving a lecture, make money giving speeches. I hope to write. That’s the main reason I’m quitting is that I want to write some things and write about politics, and I can’t write when I’m distracted. And I think I want to do some more TV commentary.
HW: What do you want to write about?
Frank: I want to write what the substantive approaches should be for liberals.
HW: Is there a memoir in the works?
Frank: No, not specifically. I will write a little bit in the second book about the history of the gay-rights movement. My career in the gay-rights movement started at about the same time. There would be some autobiographical elements, but it won’t be an autobiography.
HW: Do you want Dodd-Frank to be your legacy?
Frank: You can’t describe your own legacy. That’s up to other people.
HW: What are you hopeful for economically as you go?
Frank: I think the American economy is a very strong one. I think with the right policies — I mean look at how our economy is performing better than any other economy in the developed world including Great Britain and Germany. And I think if we can stop all this spending on the military, put more money into education, our long-range prospects are very good.
