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Broader regulatory structure of the dodd frank wall

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broader regulatory structure of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In Chapter 9, we discuss the economics of subsidizing home ownership. We recommend that the government’s affordable home ownership objectives be substantially shrunk in size, remain pre-funded at all times, and be housed in the Federal Housing Administration (FHA) and/or elsewhere in the Department of Housing and Urban Development (HUD) instead of being entangled with the objective of developing a healthy secondary market for mortgage securitization.
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104 8.1 Discontinue the Investment Function of the GSEs As we discussed in detail in Chapter 1, the GSEs not only guarantee conforming mortgages held by other investors, but they also actively invest in a large portfolio of mortgage assets: the so-called retained portfolio. At the end of 2009, Freddie and Fannie either guaranteed or owned $5.39 trillion dollars in mortgages, fully $1.71 trillion of which (27% of the total) was owned in portfolio. This 27% retained mortgage share is down from 44% in 2002, but is only slightly below the 2008 all-time dollar high of $1.76 trillion. The rationale for this retained portfolio was to promote liquidity in the secondary mortgage market. Higher liquidity, it was believed, could make secondary mortgage markets more efficient and would ultimately trickle down to homeowners in the form of lower mortgage rates. We believe that this reasoning is obsolete at best and probably false. It is obsolete because the market for conforming mortgage-backed securities is one of the largest and most liquid fixed income markets in the world. By now, markets have had almost 40 years of experience in trading conforming mortgage-backed securities. We believe that they do not need continued liquidity support in the form of proprietary trading purchases from the GSEs. It is potentially false, because there is no evidence for a direct link between the size of the GSE portfolios and the liquidity of secondary mortgage markets. 52 In reality, the retained portfolio management business became the cash cow of the GSEs. Rather than making markets more liquid, it had as its true objective to make money for the shareholders, traders, and CEOs of the GSEs, just as is true of any other hedge fund. The CEOs gained enormously: Richard Syron of Freddie Mac and Daniel Mudd of Fannie Mae each took home $28 million in 2006 and 2007 alone. Ominously, these were exactly the years that the GSEs ramped up the risk of their portfolios the most. Even under the current conservatorship, compensation seems excessive. For 2010, the Treasury Department and the Federal Housing Finance Agency approved CEO compensation of $6 million each, including $2 million incentive payments for each executive. In sharp contrast, Benjamin Bernanke, the chairman of the Federal Reserve earns $191,000 per year, or 30 times less.
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