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Federal regulator calls for turning GSEs into utilities

For the first time, the conservator of Fannie Mae and Freddie Mac has revealed its preferred blueprint for housing finance reform.

In a position document and letter sent to the U.S. Senate Committee on Banking, Housing and Urban Affairs on Tuesday, Federal Housing Finance Agency (FHFA) Director Mel Watt made the case for turning the government-sponsored enterprises (GSEs) Fannie and Freddie into shareholder-owned utilities, and allowing for other chartered companies to compete against them in a heavily regulated system.

gseloancountsWatt’s position is outlined in a seven-page document entitled the “Federal Housing Finance Agency Perspectives on Housing Finance Reform.” It envisions a system where Fannie and Freddie, and possibly other competitors, purchase mortgages and package them into securities through a shared platform.

These would be different companies than the ones that took heavy bets and lost during the last housing bubble a decade ago, and then needed a massive taxpayer bailout and were taken over by the government in 2008.

The newly chartered enterprises would have regulated returns, with small and restricted investment portfolios, and the entities would remain under the thumb of a strong federal regulator.

FHFA also supports the continuation of a government-guaranteed security, but with layers of protection built into the system that would shield taxpayers from risk. The utilities would be required to hold sufficient capital to cover losses during downturns, and also continue to offload risk to the private sector through risk-sharing vehicles.

Watt also favors the creation of an insurance fund, which would insure the bonds in the event of catastrophic losses.

FHFA’s position statement adopts many of the big-picture goals appearing in several reform plans, among which are ensuring the widespread availability of affordable 30-year fixed mortgages, maintaining a level playing field for small lenders, and ensuring that rural and low-income borrowers have access to mortgages.  

“A more narrowly tailored government role can support broadly shared housing-policy goals while protecting taxpayers from the risk of another bailout,” the document said.

The Senate Banking Committee held hearings last year on housing-finance reform and is widely expected to produce a bill this year.

In a statement, Mortgage Bankers Association President David Stevens applauded Watt’s paper, noting the similarities with the MBA plan.

Other trade groups also were pleased.

“I think this is extremely helpful,” said Scott Olson, executive director of the Community Home Lenders Association. “They are the regulator, and have been working with them for many, many years. So, it is extremely constructive to have their views and perspective.”

Watt, an Obama appointee whose five-year term will end in 2019, has previously called the current state of affairs “unsustainable,” and urged congressional action to pass legislation that would enable a smooth path to end the GSEs' conservatorship. In speeches and testimony, he has discussed some of his big-picture goals for reform, but not in this detail.

FHFA has not published Watt’s letters to the Senate banking committee. It was first reported on Wednesday by Bloomberg News.  

A spokeswoman for FHFA, in an e-mail, declined to release the documents, saying, “We don’t share congressional letters.” 


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