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GSE reform remains a long shot in 2015

March has brought the first major legislation to be introduced in Congress this year that proposes to wind down Fannie Mae and Freddie Mac and overhaul the housing finance system. More bills could come out of the U.S. House of Representatives and Senate that piggyback on the flurry of proposals from last year, but few expect large-scale reform to the government-sponsored enterprises (GSEs) until after the presidential election, analysts told Scotsman Guide News.

“The last Congress showed that this is a very complex issue and will take time, and I think that fact alone means that this might be a big lift to get done this year, and is at least a couple-year process,” said Brad Thaler, vice president of legislative affairs at the National Association of Federal Credit Unions. Thaler said some reform could take place this year if it is taken up early, but is not likely even though it remains on the Congressional agenda.

“It is just a very complex issue and something that will take time,” he said.

Earlier this month, a group of Democrats, led by Reps. John K. Delaney, John Carney and Jim Himes announced they were reintroducing a bill that would wind down the GSEs and create a supersized Ginnie Mae that would create an insurance program. Fannie and Freddie would be sold and recapitalized after five years. Under their plan, the private sector would have to assume first position for 5 percent of the risk in backing securities in case of losses. After that, the government and private insurers would share 95 percent of the risk. An identical bill was introduced last year, but it never made it out of committee.

Several other Democrat- and Republican-sponsored proposals were made last year to overhaul the GSEs, including the bipartisan Johnson-Crapo bill in the Senate Banking Committee. That bill, considered the best shot to overhaul the system, was narrowly approved in committee, but didn’t garner enough support to make it to the floor.

There remains, however, widespread support for reform of the GSEs in the banking industry.

“We think there needs to be a governmental role but it needs to be sharply reduced from what it is, where it is not carrying 100 percent of the risks,” said Joseph Pigg, senior vice president and senior counsel with the American Bankers Association. “It needs to be scaled back so that the private sector takes on a lot more of that risk and reward.”

Pigg called the Delaney-Carney-Himes proposal “a plausible solution.” That bill is being framed as a way to protect the 30-year-fixed mortgage, which has become a preferred product for American borrowers, but which could be threatened if there isn’t government backing or a federally-guaranteed insurance program that minimizes private risk

Pigg said few people believe Freddie and Fannie should remain indefinitely under government control in conservatorship, but reform won't happen quickly unless there is an economic shock that requires Fannie and Freddie to make a large draw on the Treasury.

The reform proposals, he noted, offer vastly different opinions on how to structure the government’s role in housing finance.

“I just don’t think the politics are right at the moment for GSE reform,” Pigg said. “I don’t see it likely happening until 2017 after the next presidential election.”


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