Written By: Joel Palmer, Op-Ed Writer
Until Congress and the Trump Administration come together to determine the fate of Fannie Mae and Freddie Mac, proposals will continue to be offered and debated by those with a stake in the future of the mortgage industry’s government-sponsored enterprises (GSEs).
The latest plan was recently released by the Mortgage Bankers Association in a 60-page white paper titled, “GSE Reform: Creating a Sustainable, More Vibrant, Secondary Mortgage Market .” The paper is a follow up toGSE Reform: Principles and Guardrails, which MBA released in January.
The MBA claims its proposal would:
• Preserve the 30-year fixed rate single-family mortgage, TBA market, and long-term multifamily financing options
• Minimize transition risks to avoid market disruptions
• Leverage competition and existing infrastructure
• Ensure liquidity through all economic cycles
• Guarantee eligible single-family and multifamily MBS only
• Increase levels of private first loss capital ahead of government
• Include strong capital supervision and regulation of activities
• Promote competitive primary market for lenders of all sizes/models
Mark Zandi, chief economist at Moody’s Analytics, said in an interview with Scotsman Guide News that while the MBA’s ideas are viable, he doesn’t believe Congress will move forward with reform until their hands are forced. That would occur, he said, if and when a recession occurs, leading to mortgage defaults and credit losses.
“It is in that environment that the pressure on lawmakers to do something will be intense from a political and, most importantly, from an economic perspective,” Zandi said.
The National Community Reinvestment Coalition (NCRC)has proposed legislation it says would provide strong regulatory oversight while ensuring GSEs can expand homeownership to underserved communities. Its proposals include:
• A government guarantee that would be limited to direct purchases of mortgage loans instead of extended to corporate debt to prevent GSEs from becoming over-leveraged.
• Uniform regulation applied across the marketplace
• An oversight bodywith stronger enforcement authority
• Prohibition on GSEs purchasing high-risk loans directly from lending institutions or via securitizations.
• A limit on the total market share GSEs can capture. Alternatively, the existing GSEs can be broken up into three or more institutions.
On the flip side, the American Bankers Association proposes a reduction in the role of the GSEs in housing finance to help private enterprise better compete.
Instead of reforming GSEs, the conservative Heritage Action for America proposes eliminating them. “Doing so would allow private institutions to return to the secondary mortgage market and expand the capital available for mortgage lending through healthy competition,” according to the organization’s position statement.
Further clouding the issue is the difference of opinion about whether reform should occur before GSE recapitalization or whether regulators should recapitalize the GSEs as a way to boost reform efforts.
About the only thing the major mortgage industry and political players can agree on is that the Freddie and Fannie cannot remain as they are. It’s been nine years since they entered into government conservatorship as a result of the financial crisis.
But reform will take a legislative effort. So far, Congress and the White House seem to be the only groups not debating GSE reform.
Which is partly why another interested stakeholder, Investors Unite, wants a more “straightforward solution” than the one offered by MBA. The group, which is a coalition of investors in the two GSEs, said the MBA plan is too complex and agrees with many that Congressional action isn’t forthcoming. It further states that legislation isn't necessary: The FHFA director could “simply exercise FHFA’s existing statutory powers to end the net worth sweep, declare the government’s preferred stock paid off…and selling the Treasury’s common stock into the marketplace.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.