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Blog: GSE debate inches forward

A subcommittee of the House Financial Services Committee held a hearing a week ago on reform of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The event didn’t garner much attention. The House GOP’s tax bill got all the press, but most major lobbies with ideas on the best way to go forward on GSE reform were there.

The chances for GSE reform are hard to gauge.

GSEreformletterTreasury Secretary Steven Mnuchin came into office with the pledge that ending the conservatorship was a major priority, but his initial promises of a relatively quick resolution have given way to reality. It is assumed that a reform bill will be introduced next year, probably through the Senate Banking Committee. A bill may also emerge from the House Financial Services Committee, which produced the PATH Act, a proposal to wind down the GSEs in five years that the mortgage industry opposes.  

Some Washington insiders are hopeful that GSE reform has a better chance now. The Trump administration appears to be legitimately interested in ending the nine-year conservatorship, whereas the Obama administration, though publicly professing to support a Congressional solution, never threw its weight behind a particular plan. The Treasury Department has been rumored to be working on a principles document that will mark out, without much detail, acceptable lines of a new system.

Whether the regime change will ultimately matter is another matter. The same obstacles remain. Every industry group says GSE reform is absolutely necessary, but they don’t agree on what to do. Any bill that Congress proposes is bound to make each special interest group unhappy to some degree.

GSE reform also is a difficult subject. Most Americans don’t care about the obscure details of loan securitizations, and how lenders come up with the money to make loans. Americans do care about getting 30-year fixed mortgages. Most people probably like the idea of getting a mortgage with a safe, fixed, long-term rate under 5 percent, but don’t associate that unusual benefit with the federal guarantee that covers almost all home loans.

Another thing working against GSE reform is there is no crisis. The economy is humming along, and the GSEs are making money. Fannie and Freddie pose little risk of collapsing to leave taxpayers covering the bill.

This past quarter, Fannie and Freddie collectively made $7.7 billion, all of which is scheduled to be scooped into the Treasury’s coffers. With numbers like that, some Americans might be inclined to ask, why in the world would you want to give that deal up? During a recession, however, when GSE losses are likely to start piling up, the current situation may not look so good.

So even with a committed administration and a renewed push from Congress, GSE reform remains uncertain. Regardless, it is probably safe to say that another big push to end the status quo for the GSEs is coming soon. 


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