Tuesday, May 31, 2011 - Netanyahu

Netanyahu: I have been in Congress nearly 6 years now. During that time, I have heard a number of speeches from the podium on the House floor. I have heard 2 U.S. presidents and any number of prime ministers and presidents and chancellors of other nations. But, last week's speech by Israeli Prime Minister Benjamin Netanyahu was the best speech I have yet heard in those chambers.

First, from a clinical perspective, he is a great speaker. He used notes, but no teleprompter. Those little glass stands that you always see when Obama speaks were not there. Not using a teleprompter allowed him to ad-lib, as he did when a protestor started yelling in the gallery, without worrying that he would get out of synch with whoever was operating the prompter and thereby either miss or repeat a paragraph. Without that machine in between him and the audience, he made a connection that others fail to make. I could feel his courage. I could feel his strength. And, most importantly, I was overwhelmed by the sincerity of his remarks. I felt he was being completely honest and authentic. Many American politicians could learn something from him.

And, from the standpoint of the message, that too was delivered resolutely and with clarity. The friendship between the U.S. and Israel benefits both countries. I suppose I could count how many times he used the word "peace" in the address, but suffice it to say that he used it a lot. Israel has no aspirations for anything other than to continue to exist as a Jewish state in peace with its neighbors. I loved it when he said that the U.S. doesn't need to employ in nation building with Israel, because they have already built. That we don't need to democratize them because they are already a Democracy. And, that we don't need to defend them because they can defend themselves. They want to recognize a Palestinian state, but only one that agrees to recognize Israel's right to exist. That is not an unreasonable request. It is also not unreasonable to request that the government of said state not include the terrorist organization, Hamas, which has not called for just the elimination of Israel, but for the elimination of all Jews. The Jewish people have seen this movie before. And, they have a right to do everything they can to ensure that they don't have to watch it again. I think that President Obama is wrong about most things. But, there is bipartisan agreement in Washington that he is wrong about trying to force Israel to return to the 1967 borders that led to their being attacked then, and will lead to attacks in the future. And, as a Christian, I believe that having Jerusalem entirely within this free country ensures access to this most holy of cities to people of all faiths around the world.

I was encouraged and inspired by the leader of the one enduring democracy and economically free and prosperous country in the Middle East. I hope there will soon be democratic, free and prosperous Arab countries in the Middle East without aspirations to destroy their neighbors. And, I wish there were more world leaders like Netanyahu. Shalom, my friend. May you succeed in attaining it.

If you would like to see the entire 45 minute speech, click on the screenshot below:

Click To Watch Video

Tuesday, May 24, 2011 - Housing Finance Reform Act Q&A

About 10 days ago, I wrote you all about the Housing Finance Reform Bill (H.R. 1859) that I have written and am sponsoring along with Gary Peters (D-MI). I mentioned in that missive that this is an important bill that will consume a great deal of my time and energy over the coming months. Based on the numerous responses from all of you, you seem to agree. I appreciate all those who responded offering your support and assistance in moving this bill forward. I will be separately contacting those of you who did soon.

Reading your responses last week, I noticed there were questions on this fairly complex issue that came up several times. So, I have decided to include the “most asked” questions into this edition and am answering them to give you an even better idea of what this bill is, how it works and why I wrote it:

1. John, isn't your bill just recreating the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac again? It looks like you are just going to have 5 of them instead of two. 

No. The whole point of this bill is to kill the old GSE system and replace it with something completely different that will provide stability for housing finance. The GSEs were/are monopoly entities formed by the government. The "associations" in H.R. 1859 will be entirely private entities and there will be at least 5 of them, but we frankly hope there will be dozens in order to create competition and spread the risk around. The existing GSEs can make mortgages, hold them in their portfolios, sell them and engage in all kinds of other businesses. In my bill, associations can only guarantee conforming mortgages and they cannot make or hold any mortgages themselves. The GSE's themselves were guaranteed by the federal government for dollar one of loss. The associations will not have any federal guarantee. The only federal guarantee will be on the mortgages and not the associations, and it will only kick in after the down payment, all capital in the entity, and all capital in the insurance fund is gone. The GSEs pay nothing for their federal guarantee, but the associations will pay a market rate to put a guarantee on a group of mortgages. In short, the GSEs were their own special entity and there was and is nothing like them. The associations in my bill will follow the model of public utilities (your electric company, for example) and the banking system. Remember that when you make a deposit in a bank, it is guaranteed by the FDIC. But, the capital requirements, limits, insurance fund and number of banks out there have made the system work even through the recent crisis.

2. How is the taxpayer protected? How do I know there won't be another bail-out like the current bail-out of the GSEs? 

As I mentioned above, my system is very different than the GSEs. The fact that there will be many of these associations and that they are not themselves guaranteed by the government means that they can fail and, if they do, there will be no government money used to prop up the entities. In order for the taxpayers to be at risk, a group of mortgage portfolios would have to first decline enough to eat through the 20% down payment (more on that later). Then, the losses would have to eat through the entire substantial capital of the association, which would then have to be insolvent. If that occurs, the losses would still then have to eat through another layer of private capital, which is the insurance fund (again, similar to the FDIC) into which all of the associations pay. Even then, the government can ask the remaining associations to pay more into the insurance fund to top it up. Bottom line is that the amount of private capital and the control of these organizations will be such that a collapse like we had in 2008 would not trigger any taxpayer liability.

3. Why not let the GSEs wind down and then not replace them with anything? Why not rely on the private sector?

Throughout my lifetime, we have always had some government support for home mortgages. Without some support, the 30 year mortgage will go away. Investors will simply not make loans of that duration, with a fixed rate, and additionally take the 30 year risk that you might not ever pay them back. If we were to wind down the GSEs without some viable replacement system, home loans would likely require 25% down or more and mortgage durations would fall to 15 years or less. This would easily trigger a 30% decline in housing prices as the payments for any home loan would rise dramatically. This decline would plunge the economy into a major recession/depression and greatly reduce the number of people able to own homes in the future. This is a disaster scenario which is completely avoidable. The government is making over 95% of all home loans right now through the GSEs and FHA. That alone is proof that there is no viable private market for such loans or it would be developing now.

4. Will I have to put 20% down to buy a house? That's a lot more than many people can afford.

Yes and no. The federal government will only provide a guarantee for 80% or less of the value of the house at the time of the loan. That means you need 20% down. This protects the taxpayer. But, there is a provision in the bill to allow for a guarantee of 10% down only if the entity originating the loan either buys separate mortgage insurance on that 10% or the originator puts up that capital themselves. In other words, my bill allows 10% down if someone else other than the association or the government takes the risk on that 10%. Furthermore, remember that loans can be made without this guarantee. It is not mandatory. And, it costs money to get it. So, if some in the private sector want to make 5% or no-down loans they can absolutely do it. But, the taxpayer and these associations will have nothing to do with them.

5. Do investors really need a government guarantee? Isn't this preferential to them?

As I mentioned above, someone who makes a 30 year fixed rate loan is taking on a lot of risk. There is the risk that interest rates will go up and their investment will lose value. This is called rate risk. There's the risk that the market will go cold on these sorts of investments.  This is market risk. There is the fact that they are loaning money for a long time and can't plan to be paid back in full for 30 years. That is duration risk. Then there is the risk that the house will drop dramatically in value and the borrower will default. That is called credit risk. The fact is that very few investors will take on all 4 of these risks at an interest rate that any borrower could pay or would be willing to pay. Would you? Would you loan money to me at 4% now for the next 30 years? No? Neither will anyone else. What the associations provide is the removal of the 4th risk (credit risk) from the equation for the end-user investor. With that risk insured by the new associations, investors are willing to accept the other risks. Then, money will flow into the market for homebuyers to borrow.

6. What about low income people? Do you provide special assistance for them in your bill?

No. By definition, the low-income borrower wants government backing because they are a significant credit risk. I understand that there are people who believe that the government should be subsidizing or otherwise assisting low income families into home ownership that they cannot afford under the structure with which all other such loans are made. I happen to disagree with those people. I believe that there is no shame in renting, and that we do nothing to help people by incentivizing them to buy something that they cannot afford. But, even if you believe as they do and not as I do, the place to do such a thing is FHA. The original purpose of FHA was to help low income people buy low priced housing. One of the causes of the housing bubble and its subsequent collapse was that we loaned money to people who could not afford to pay it back. Let's not pollute 95% of the market again with this small percentage of loans, and either eliminate social engineering or keep it separate and contained.

7. The housing market is still recovering. Doesn't an entirely new system jeopardize that recovery? 

Quite the opposite actually. Everyone knows that the GSEs can't continue as they are presently. But, no one knows what will be next. That uncertainty hangs over the housing market right now and is part of what is holding it back. This bill removes that uncertainty and gives the marketplace the assurance that 30 year fixed rate mortgages will be available in the future on a stable and consistent basis. People will then feel confident re-investing in housing.

Monday, May 16, 2011 - Housing Finance Reform

Housing Finance Reform: Housing is an enormous sector of our economy. We never go into recession without housing leading us in. And, we never come out without housing recovering. Arguably, part of the reason that our current economic recovery is so tepid is because the housing recovery is very weak. When you consider the construction of new houses, the sales of existing houses, the construction and remodel and renting of apartments, the home improvement industry and so forth, it represents a tremendous amount of employment, economic activity and is fundamental to a standard of living. And, none of it moves without adequate financing. Hardly anyone buys, builds or improves a house or apartment paying cash. Pretty much everyone needs to borrow some money.

The method under which most people borrowed that money during the last 70 years was through the assistance of the "government sponsored enterprises", Fannie Mae and Freddie Mac. And, it worked pretty well for most of those 70 years. But, as we all well know, both enterprises failed rather spectacularly in 2008 and were a major component of the economic crash that year. The reasons for this failure are beyond the scope of this missive, but suffice it to say that the model broke down, the housing market collapsed and the federal government had to rescue them to the tune of $138 billion to date. Taxpayers now own these entities.

Today, roughly 19 out of 20 home mortgages in the United States are made by and guaranteed by the U.S. government through Fannie, Freddie or FHA.

There is a general agreement in Washington that this cannot continue and that these entities must be liquidated. However, there is not agreement on what the proper system should be to replace them.    

There are some Republicans who want to replace them with nothing and let the private market handle it. This will not work. The 30 year mortgage will disappear under this option, in part because the FDIC will not allow banks to make and hold such mortgages anymore because of some of the bank failures caused by the mismatch of long term loans against short-term bank deposits. Also, all markets are subject to cycles.  If you want to buy a house or sell yours at a time in the cycle when banks decide they don't want to lend money, then you pretty much can't sell your house or buy one until the banks change their minds. This combination of factors will lead to a huge decline in home values, which (because of the enormous size and impact of the housing sector discussed above) will lead to a new and deep recession. Bad idea. Very bad idea.

There are some Democrats who believe that the government should be the only maker of home loans. Furthermore, they want to charge more to borrow money on more expensive homes and subsidize certain ethnic or income groups to obtain very cheap loans that really don't have to be paid back. This is the gateway to socialized housing (to go along with socialized medicine and everything else). Equally very bad idea.

Fortunately, those two extremes (no government involvement and complete government involvement) are beliefs held by a relatively small number of congressional members.

The correct solution, the one that will work, is in the middle. To this end, last week I introduced the Housing Finance Reform Act along with my Democratic cosponsor, Gary Peters of Michigan. This bill will liquidate the failed Fannie and Freddie and replace them with multiple (hopefully 10, 20 or more) privately held and funded "associations" to guarantee mortgages. These associations will act very much like the public utility that sells you electricity or natural gas. They will be highly regulated by a newly created regulator that will be very independent of political influence. They will not be allowed to be in any other business other than guaranteeing mortgages. They cannot be controlled by entities that originate the mortgages. They will be able to purchase a limited, but explicit federal guarantee of the mortgage security, not the association. That federal guarantee is what will allow 30 year fixed-rate mortgages to continue and what will create stability in the market so that mortgages are always available to credit-worthy borrowers. But, the guarantee will be very different than what Fannie and Freddie had. There will be a whole lot of private capital that will have to be lost before any taxpayer money is at risk. As a general rule, 20% down payments will be required. The associations will also hold a lot of capital, which must be lost first. And, the money they pay for the federal guarantee will work like FDIC insurance in that the payment creates a fund to cover losses should one of the associations fail. And, even then we can assess additional money from the associations to fill up the fund should it be depleted by a failure.

OK, this is really technical stuff. I am a geek. I actually wore a real pocket protector in high school so that my colored pencils, mini-slide rule and protractor did not stain my shirt. Anyway, if I haven't lost your attention yet, suffice it to say that this is a bipartisan effort to create a private capital structure with a very well protected and disbursed federal guarantee so that we can have a robust, but sensible housing finance market again to allow housing to recover and prosper over time. For those of you who can't get enough of this, we have provided links to the bill itself, a summary of the bill and The Wall Street Journal exclusive coverage of it from last week.

The Wall Street Journal: “Bill Proposes Mortgage Shake-Up”

Text of H.R. 1859, the Housing Finance Reform Act

Summary of H.R. 1859, the Housing Finance Reform Act

As my last missive indicated, we Republicans are at loggerheads with Democrats on the budget and spending and the debt and immigration and energy and a whole host of other issues. My philosophy of politics has long been that even if you and I disagree on 19 out of 20 issues, it means there is one place where we can work together.

This, I believe, is that place. It just happens that the right solution is at the arithmetic median of the political spectrum. It is needed because Fannie and Freddie cannot continue as they are for long. It is important because removing the uncertainty about the future of housing finance will trigger significant economic growth and job creation across the country. And, this bill has the opportunity to actually pass the House AND the Senate AND be signed by the president in order to become law and not just a talking point. I, and my cosponsor, serve on the committee of jurisdiction for this bill (Financial Services Committee), and so this will be a major focus for me in the coming months.

If you agree with what I am doing, I need your help. This stuff is complicated and it is a challenge to explain to my colleagues of either party. If you want to help educate those colleagues through calls and e-mails, contact my office to indicate your willingness.

I am an excited geek. It's not going to be easy, but I think we can do this. And, by doing it, we can improve the economy and preserve the American dream of owning a home of your own.

Thursday, May 12, 2011 - Medicare and Seniors and Such

Medicare and Seniors and Such: Remember back in the early 2000's when then-President George W. Bush proposed reforming Social Security with an option to set up "private accounts"? In spite of Republican control at the time of the White House, the House and the Senate, the proposal failed to garner the requisite 60 votes in the Senate and therefore did not become law. Democrats used this to some success in the next election by relentlessly pounding Republicans for trying to "end Social Security".

It is now 10 years later and no reforms of any significance of any of the entitlement programs have been enacted. Like 10 years ago, Republicans are proposing another reform. But, unlike 10 years ago, the country's financial situation is far more dire, with record deficits and record debt and all of the entitlement programs facing collapse. However, the Democratic National Committee's (DNC) political playbook remains unchanged. They are excoriating Republicans around the country for "voting to end Medicare" by supporting the Paul Ryan budget. Never mind that Medicare taxes currently only cover about half the cost of the program today. Never mind that 10,000 Americans now turn 65 (and become eligible for Medicare) every day, and not nearly that many people are entering the system at the other (paying) end. Never mind that the way to end Medicare is to do exactly what the Democrats propose to do, which is nothing. If we leave it alone, it will become so upside down in just a few short years that it will end.

Frankly, I think the Ryan plan is actually not aggressive enough. It "grandfathers" anyone 55 or older into the existing program. I happen to be 55 years old, so that is me. By grandfathering the likes of me, you ensure that we will not reduce costs in the program for at least 10 more years, and you are locking in some of those costs for the next 25 years (roughly my life expectancy). I don't think we have that much time before the system implodes. In Britain, they made changes which asked 65 year-olds to wait 2 more months before becoming eligible for their programs, and a 64 year old to wait 4 months and so on. This enabled them to save money right away without making things too tough on anyone and they are on track to balance their budget in about 4 years.

Those of you reading this who work for the DNC or the DCCC can now begin the chant of how much I clearly hate seniors, etc. etc.

What is not being talked about much is how the real damage to seniors' future is being done right now through the policies of those very people who are critical of any sensible plan to reform entitlements. The current policy of high-deficits and printing money and holding artificially low interest rates is actually eroding the living standards of seniors much more so than anything they can pretend that Medicare reform would do.

Let me explain. Seniors live on fixed incomes. That income is often derived from interest and dividends on investments from a lifetime of saving and retirement planning. Those investments are usually made in relatively low-risk instruments since seniors do not have the time to earn the money again should the investment go bad. One of those investments traditionally has been Treasury Bills. Today, a 5 year Treasury Bill yields under 2% annually. But real inflation (so-called headline inflation) is running around 5%. And, the easy-money strategy to monetize our debt is depreciating the value of the dollar, which is further reducing purchasing power. The bottom line is that a senior saving money on a 5 year Treasury Bill will likely lose 15-20% purchasing power from their money even after the interest is taken into account. In other words, today’s' policies are punishing savers.

Why don't we ever talk about that? The responsible individual (which is most people) who puts something away for his or her retirement is the one suffering the most from the current policies. Maybe the DNC doesn't care about these people?

We must reform Medicare, Medicaid and Social Security, and we must do so soon and aggressively. If we do not, these programs will collapse, our economy will be severely damaged and we will further discourage people from and punish them for saving and taking care of themselves. And, we will simultaneously reduce living standards for seniors and opportunities for younger people. If you don't like our proposals, then put forward your own. We cannot continue to endlessly give ourselves benefits without paying for them and not have a bad outcome.

I don't care about the DNC's political rhetoric. That's the simple truth.