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Blog: House leader budges on GSE reform

House Financial Services Committee Chairman Jeb Hensarling recently signaled that he is willing compromise on housing-finance reform.

The Texas Republican acknowledged that the PATH Act, the bill that he has championed for years, lacks needed support. The PATH Act proposed to wind down Fannie Mae and Freddie Mac within five years and eliminate the government's guarantee on mortgages. The mortgage industry was strongly against the PATH Act. The bill was widely viewed as dead legislation. But so long as Hensarling controlled a key House committee (he has announced that he will not seek reelection in 2018), any alternative proposals had little chance of gaining traction.

gsehensarling“While I personally have not changed my principles or my mind that the best path forward remains the PATH Act, after carefully surveying today’s political landscape, I do not see the PATH Act’s passage likely, especially in light of super-majority threshold in the Senate,” Hensarling said on Dec. 6 during a speech at a National Association of Realtors’ sponsored conference on housing.

Notably, Hensarling said he favored a so-called Ginnie Mae model recently advanced by former Federal Housing Finance Agency Acting Director Ed DeMarco and Michael Bright, who is now acting president at Ginnie Mae.

Ginnie Mae, a government corporation under the umbrella of the U.S. Department of Housing and Urban Development (HUD), insures timely payment to investors who purchase securities underpinned by government-backed mortgages. Unlike Fannie and Freddie today, Ginnie insures only the payment on the bonds, and does not purchase and securitize loans.

The DeMarco-Bright plan calls for Congress to re-charter Ginnie Mae, and separate it from HUD. This new Ginnie entity would begin insuring mortgage securities underpinned by conventional loan pools composed of standard mortgages that are now purchased by Fannie and Freddie.

In addition, under the plan, Fannie and Freddie would be transformed to serve two primary purposes. The new Fannie and Freddie would still buy and aggregate loans, but on a more limited scale. They would no longer be shareholder-owned companies, but collectively owned by their seller-servicers. The new Fannie and Freddie would continue to provide a cash window for small and mid-sized lenders to sell loans, which would be aggregated into securities. The restructured entities also would serve as vehicles to aggregate and sell risk on the secondary market.

The goal behind all this would be that private companies, like banks and loan aggregators, could assume a much greater role in the mortgage market. Right now almost every mortgage is backed in some way by the government, and much of that risk is concentrated on the books of Fannie and Freddie, and ultimately falls to U.S. taxpayers. The goal is to create a system in which the private sector assumes almost all of the risk and prices that risk accurately; that allows small lenders to compete on a level playing field; and that ensures popular loan programs, like the 30-year fixed mortgage, survive at reasonable rates.

The DeMarco-Bright plan preserves an explicit government guarantee that would ensure that the mortgage market doesn't collapse during a severe economic downturn. The reforms also would scale down the Federal Housing Administration loan program, so that that the program primarily serves first-time borrowers and lower-income homebuyers.

“I believe the DeMarco-Bright proposal provides a credible, implementable, battle-tested way to create a new, limited-government guarantee in a post-GSE housing finance system, and one that deserves to be fully explored by Congress as part of any comprehensive housing finance-reform effort,” Hensarling said.

The Ginnie model is bound to meet resistance, however. In an editorial published on Wednesday, Dec. 13, Mortgage Bankers Association (MBA) President David Stevens argued against the Ginnie model. MBA favors a system that would convert Fannie and Freddie into private utilities, and allow for other chartered GSE-like entities to buy and securitize mortgages. The MBA plan, however, has the same big-picture goals as does the DeMarco-Bright plan.

Trade groups representing small lenders also could potentially come out against the DeMarco-Bright plan, fearing that the nation’s biggest banks would come to dominate the secondary market, and use that as a way to gain a market advantage in pricing mortgages on the retail side. Fannie and Freddie shareholders also are against moving toward the Ginnie model. 


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