Hensarling's Aggressive Agenda Starts with Housing Finance Reform

Third in a series

WASHINGTON — Arguably the most outspoken, staunchly conservative member of the House Financial Services Committee, Rep. Jeb Hensarling appears eager to help shape the panel's agenda next year if the Republicans seize the House in next week's elections.

Put succinctly, the Texas Republican's goal is to peel the government out of the market in as many places as possible, including eliminating Fannie Mae and Freddie Mac, reforming the Federal Housing Administration and overhauling the Dodd-Frank regulatory reform act.

"I am concerned with politicizing the market. I want to get the government out of corporate governance decisions," Hensarling said in a recent interview about his priorities for next year. "I have got lots of energy and lots of time, and by the standards of Congress, I'm relatively young and relatively passionate. … Frankly I think we are going to be very, very busy."

Hensarling, the top Republican on the panel's financial institutions subcommittee and the No. 2 GOP member of the Budget Committee, has shot through party ranks as a prominent conservative leader recognized for his zeal to reduce government and slash spending.

As one of the top five House Republicans to contribute to the National Republican Congressional Committee (whose mission is to elect Republicans to the House), he is widely considered in line to become chairman of the House Republican Conference or win a different GOP leadership slot.

From his perch in the Financial Services Committee, Hensarling has stood out as a leader, framing his party's message of opposition to Democratic ideas with sharp themes and catchy lines. The government's failure to put Fannie and Freddie on the books was "accounting that frankly would have made Bernie Madoff blush," he said in the interview. He has repeatedly said "it is time to bail out the American people from bailout mania."

He has often managed the GOP side of the debate during committee hearings and votes, frequently offering the most amendments and requiring a recorded vote on each one, even when it is obvious they will fail, in order to make a point.

Hensarling is against just about every financial services policy to emerge from Washington in the last several years, including the Troubled Asset Relief Program, the Credit CARD Act and the Dodd-Frank Act.

He calls the Community Reinvestment Act a relic of a bygone era and said he would "absolutely" consider sending it to the chopping block.

Although most pollsters are now predicting the GOP will win back the House, Hensarling said up front that he is not assuming anything about the election's outcome, and said his agenda remains the same no matter who is in charge. "Being the son and grandson of chicken farmers, I don't count my chickens before they hatch," he said. "The priorities will be the same regardless of majority or minority status. We'll just simply be far more effective should we be in the majority."

The reform issue likely to command the bulk of Hensarling's attention next year is housing finance.

"Clearly for me the great unfinished business on the Financial Services Committee is any kind of reform of Fannie and Freddie," he said. "I believe it was at the epicenter of the financial crisis. Clearly Democrats have been kicking the can down the road. We need a system that will end the taxpayer hemorrhage at Fannie and Freddie."

Hensarling criticizes both political parties for pushing consumers to buy homes and live out the American Dream, even if they couldn't afford it.

"In general, we've had a lot of federal policies that either incented, strong-armed, or cajoled financial institutions to loan money to people to buy a home that they could not afford to keep," he said. "My principles are I want to err on the side of competitive markets that have disclosure and empower consumers with the information they need to make intelligent choices. And I think that frankly a lot of the housing policies that have taken place over both successive Republican and Democratic administrations are going to have to be re-examined."

Hensarling wants to dismantle the government-sponsored enterprises and has led the GOP efforts to privatize the mortgage market with a bill called the GSE Bailout Elimination and Taxpayer Protection Act. It would gradually phase out their portfolios and increase their capital and is expected to serve as the Republicans' starting point next year.

"I have legislation that over a five-year period would transition Fannie and Freddie back into a competitive market," he said. "It is certainly a bill that I will be pushing even harder in the next Congress and working with other like-minded individuals in trying to get that done. My great fear is that frankly most of the underlying conditions that brought us to the economic crisis are still in place and were not addressed in Dodd-Frank."

The bill would end the conservatorship of the GSEs within two years and if they are "financially viable" allow them to resume operations for a transition period of three years.

It would permanently repeal the GSEs' affordable housing goals and would gradually shrink their portfolios; increase their minimum capital requirements; increase required down payments; and reduce the conforming loan limit. At the end the government charters would expire.

The bill has the support of several Republicans, including the Financial Services Committee's ranking member, Rep. Spencer Bachus of Alabama, whom Hensarling expects to be the next chairman if the GOP wins control of the House. So, Hensarling said, he hopes the bill will be part of the GOP agenda next year.

"Obviously the fact that he's a co-sponsor means a lot," Hensarling said, referring to Bachus.

Hensarling said that, though 95% of the mortgage market relies on Fannie Mae, Freddie Mac and the Federal Housing Administration, a slow wind-down of the GSEs is a feasible way to force a private market to establish itself to fill the void.

"Slowly but surely, you ratchet down their conforming loan limits," he said. "Slowly but surely, you ratchet up their capital standards to that of a well-capitalized bank. You slowly but surely increase the down-payment requirement and you allow the private marketplace to come into those areas where Fannie and Freddie on an ongoing basis begin to retreat so that a competitive market can begin to come in."

A private market can't get started as long as there is a government guarantee for mortgage debt, whether implied or explicit, Hensarling said.

"No one is going to compete with Uncle Sam — who's got a printing press, who can print money and can put untold trillions of liability exposure on the taxpayer. Nobody is going to compete with that," he said.

Hensarling worries that although Democrats say they want to eliminate the GSEs, they actually want to keep them going.

"My fear is that Democrats would like to put Fannie and Freddie into the federal witness protection program, and we are faced with giving them a new name, giving them a new wardrobe, but ultimately unleashing them back into society again," he said. "I think that would be a very, very bad thing."

Hensarling also wants to shore up the Federal Housing Administration. "FHA is not financially sound," he said. "If it is going to exist, it needs to be financially sound, actuarially sound. Today, I'm not convinced that it is."

Still, he said, the FHA is the most functional piece currently of the government-supported housing models and has a role to play as a social safety net.

"I believe housing should be part of the social safety net, but I want it designed for those who potentially are too old, too disabled, too young to help themselves," he said. "And whatever we do, it probably ought be done through an FHA-like structure. But it has to be actuarially sound and it needs to be on budget."

Even if the Republicans do win control of the House in November, it's unclear whether the Obama administration would be willing to work with the GOP. But Hensarling is decidedly pessimistic about the administration's handling of the GSEs.

"I've been terribly, terribly disappointed in the administration," he said. "They continue to kick Fannie and Freddie down the road. They've had reform rhetoric, but it reminds me again that I agree with 80% of what the administration says; I just disagree with 80% of what it does, and in this case being absolutely negligent at the expense of the American taxpayer."

Overseeing and revisiting the Dodd-Frank Act is another top priority. Hensarling says it is rife with examples of the government overstepping into the market.

"I'm not sure I've ever seen in my life a greater transfer of power from the people to their elected officials and consequently from their elected officials to the unelected bureaucracy, and that really concerns me," he said.

He cited the hundreds of rules that regulators must promulgate under the law, and said the Financial Services Committee must conduct oversight of the agencies.

"It will be incumbent upon the Financial Services Committee, to … ensure that these rulemakings are done deliberatively, done intelligently, done using a cost-benefit analysis," he said.

One of the first things he would like to tackle is restricting the powers of the Consumer Financial Protection Bureau. He said that looking at simplifying consumer disclosures is appropriate but that the bureau has the power to set prices, which is un-American.

"Anything that smacks of wage and price controls, and anything that allows the opportunity for crony capitalism, allowing Washington to pick winners and losers, those will be high on my priority list to repeal in Dodd-Frank," he said. "The CFPB should not have the ability to take away a product. Period. Paragraph. That is an affront to the economic liberty of American citizenry."

But Hensarling appears to be OK with allowing the bureau to exist in some fashion with limited but centralized power to inform consumers.

"The value to be added — having a centralized agency in dealing with consumer communication — frankly I think may have some merit," he said. "I believe uniformity could be helpful in dealing with the existing consumer laws that we have today. To give an unelected, unconfirmed czarina unfettered power to ban products that she may deem as quote-unquote unfair or abusive in her purely subjective opinion, I think is outrageous."