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Blog: GSE reform returns to center stage

A U.S. Senate banking committee hearing held last week took away any doubt that its members will take another stab at reforming the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. There remains a divide, however, over how the country should extricate the GSEs from their nine-year federal conservatorship. In 2008, the government took over the GSEs and now tightly controls what they do and also scoops up almost all of their profits. If the economy suffers another crisis, taxpayers could be on the hook for billions of potential GSE losses. 

Republicans and Democrats, as well as lenders and policymakers, all seem to agree that the current system isn’t acceptable. Something needs to be done to end the conservatorship and move the GSEs away from direct government control. Getting there is another matter.

gsereformeffortThere are two broad schools of thought. The first one — as expressed by the largest mortgage and housing trade groups — wants to let Congress, under the leadership of the Senate banking committee, produce a bipartisan bill. This bill would be comprehensive, likely change the GSE charters and possibly even allow for more companies to compete against Fannie or Freddie. Other plans call for jettisoning the existing system and allowing for just one GSE, or none at all.

The other side, as represented by smaller trade groups, community activists and the GSEs private shareholders, is most interested in preserving Fannie and Freddie as the dominant housing-market financiers. Their priority is to recapitalize them and get them out of conservatorship as quickly as possible.

Fannie Mae and Freddie Mac remain really important institutions. They fund more than half of all the home mortgages made each year by purchasing and securitizing home loans made by primary lenders. That being said, it is probably fair to say that GSE reform doesn’t inspire the same passion as tax and health care reform. The average American may have heard about Fannie and Freddie, but likely have only a vague sense of what they do.

Whatever form it takes, the reforms will likely be sold to the public as a way to protect the 30-year fixed mortgage, while also ensuring that the housing-finance system doesn’t malfunction again and put taxpayers at risk of bailing out the GSEs.

Winning over small lenders

It is becoming clear, too, that those who favor significant changes to the system will try to woo small lenders. You could see this during last week’s Senate banking committee hearing.

MBA President David Stevens, one of the three people invited to testify, for example, began his remarks by reminding the committee that a large cohort of the trade group’s bank members are smaller lenders. MBA envisions turning Fannie and Freddie into utilities and chartering other companies to compete against them. Stevens said the trade group’s plan was developed with input from its small lenders, and their proposal protects them.

MBA’s plan depends on Congress taking action. MBA does not favor recapitalizing the GSEs until Congress passes reform legislation.

Small lender groups, such as the Independent Community Bankers of America (ICBA), have a much different vision of how reform should play out. The first priority of these groups is for the GSE regulator, the Federal Housing Finance Agency (FHFA), to allow the GSEs to rebuild capital. They are open to the idea of Congress turning the GSEs into utilities. And yet, they also say that Congress doesn’t necessarily have to make significant changes to them.

Fannie and Freddie, which have already been substantially reformed from within since the 2008 crisis, could be recapitalized over the next few years, released in their current states and regulated by the FHFA.

Ahead of last week’s Senate banking committee’s meeting, the Community Mortgage Lenders of America (CMLA), the Community Home Lenders Association (CHLA) and four civil rights and advocacy groups released a set of principles for GSE reform. This so-called Main Street GSE Reform Coalition called on the FHFA to make moves to recapitalize and release Fannie and Freddie from conservatorship. In the past, CMLA and CHLA have supported reforms by Congress that would turn them into regulated utilities. There was no mention of doing that in last week’s release.

It will be interesting to see what the FHFA does over the next few months. FHFA Director Mel Watt, an Obama appointee, will still be in charge of the agency through most of next year. Members of the Senate banking committee have asked him not to make changes that would hinder their efforts to produce comprehensive legislation.

In May, Watt testified before the banking committee. He again expressed concerns about the GSEs diminishing capital buffers, which are scheduled to go to zero at the start of 2018. He hinted that he could withhold the dividend payments to Treasury this year, a move that would put him at odds with the Senate banking committee members.

“If the two parties can’t dance [on GSE reform], I  may have to dance by myself,” Watt said. 


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