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GSE reform rises again

Housing-finance reform is back on the congressional agenda.

Members of the U.S. Senate banking committee pledged on Thursday to produce a bipartisan bill possibly as early as this year that would address reforms of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and ultimately end the government’s nine-year conservatorship of the GSEs.

fannieDuring a Senate hearing on GSE reform, committee members didn’t tip their hands much on what direction the new bill will take; however, the testimony from some key members suggests they will try for significant legislation.

“A housing-finance system dependent on two government-sponsored enterprises is not the solution,” said Sen. Mike Crapo, R-Idaho, who chairs the committee.  “Recapitalizing them early and releasing them back into the market without significant reforms is also not the solution. The current system is not in the best interest of consumers, taxpayers, investors, lenders and the broad economy.”

Fannie and Freddie purchase and securitize the most popular U.S. mortgages, which represents just over 50 percent of the overall market. The GSEs were bailed out by the government in 2008 during the financial crisis and have remained in a conservatorship through which the government tightly controls what they can do and scoops up almost all of their profits. Taxpayers are ultimately on the hook for any GSE losses, however. The government has extended a massive a line of credit to the GSEs via the U.S. Department of the Treasury in the event of losses. Efforts to reform the GSEs during the Obama administration were not successful.

Sen. Bob Corker, R-Tennessee, who has co-authored one GSE plan, said there has been “a consolidation of ideas” on several points and “reform is coming to a place where we are going to pass a piece of legislation this year.”

Corker specifically mentioned that the government needs to provide some degree of an “explicit guarantee” that will reassure investors in GSE securities, and that the government should be reimbursed for that backing. He also said most people now believe that a heavy layer of private capital needs to stand in front of that guarantee. Most proposals appear committed to the idea that mortgage credit needs to be made widely available to consumers and that small lenders should have access to the secondary market.

Corker also said there is a consensus that the government should build on the reforms already undertaken, and to use the existing infrastructure. The GSEs have been substantially reformed from within since the housing crisis. Fannie and Freddie have been developing a common securitization platform, for example, and plan to launch a common security.

Sen. Sherrod Brown, D-Ohio and the ranking Democrat on the Senate banking committee, said he was especially concerned with how GSE reform will affect small lenders, and also how changes would affect the cost of mortgages.

Brown said previous reform proposals have focused more on how to attract private capital, rather than the costs.

“Underrepresenting those costs will have consequences for access to credit,” Brown said. “It could reduce homeownership rates if new borrowers cannot get access to new mortgages at affordable rates.”

Brown also said he would like to hear more testimony from small-lender associations.

The committee heard testimony from David Stevens, president of the Mortgage Bankers Association; Ed DeMarco, the former acting director of the Federal Housing Finance Agency; and Michael Calhoun, president of the Center for Responsible Lending. 


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