Scotsman Guide > News > July 2018 > News Story

 Enter your e-mail address and password below.


Forgot your password? New User? Register Now.

News Archives

Subscribe icon Subscribe to our weekly e-newsletter, Top News.

GSE reform starts with a recapitalization plan

The White House last month called for revamping the nation's housing-finance market by privatizing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and also creating several similar entities that would bankroll conventional mortgages. That plan, however, would be dependent on Congress passing legislation to restructure the system, a daunting task that has for nearly a decade proven to be too great a hurdle. William Giambrone, president of the Community Home Lenders Association (CHLA),a nonbank trade group, discussed the chances for GSE reform in the second half of President Donald Trump’s first term.

willgiambroneIt would seem that GSE reform has stalled. Would you say that is an untrue or fair characterization of how things stand now in Washington?

Well, it depends on how you define GSE reform. If you define GSE reform as Congress acting, then I would say that is probably accurate. If you define GSE reform as the FHFA [Federal Housing Finance Agency] making reforms, I would say it has been ongoing since [former acting FHFA Director] Ed DeMarco and on into [the tenure of current FHFA Director Mel] Watt. For example, the risk sharing. That is somewhat of a reform, in the sense that they [the GSEs] are selling off some risk on the back side of these transactions. That is a reform of a type, so to speak, but a formal plan of reform, no, it hasn’t happened.

Is there any chance at all that Congress will pass legislation this year or in Trump’s first term that addresses the GSEs conservatorship?

It is probably an easier question to answer after the mid-terms. It looks like this year is dead. So, then you have got mid-terms. Generally speaking, in mid-terms, the minority party becomes the majority party, at least in some part of Congress. Let’s just say the House goes Democratic and the Senate stays Republican. In that instance, can you get anything done?  Your easiest shot was these two years. This is similar to Obama’s first two years, when he had complete control and got Obamacare done. This is when Trump had complete control, so to speak, and it didn’t get done. I would say that the probability might be less next year because now you have got to get the two sides together.

Absent Congress doing anything, do you believe the Trump administration under the direction of Mel Watt’s successor as FHFA director will take steps to end the conservatorship and privatize the GSEs?

Yes, I think they will take more steps. That is what we have seen to this point. As for the actual release of them [from conservatorship], I don’t know if an FHFA director or the administration would go that far. [The law] allows for that under HERA [the Housing and Economic Recovery Act of 2008], but I am not sure they would let it go that far. Releasing them means that they would have be properly capitalized. The biggest problem is they are not probably capitalized.  They have a line of credit from Treasury. If you were to release them, in theory, you would end the line of credit. They can retain $3 billion each in reserves, but $3 billion is not even remotely near what you would need. It is $150 [billion] to $200 billion that you need in capital [for each GSE] to be on their own and properly capitalized.

Some trade organizations are concerned that the new FHFA director will make moves to reduce the GSE’s footprint, by raising the cost of the loans and tightening up the standards. Are you worried about this too?

I do, but I just don’t know if I have their high concerns. A lot of it depends on how the administration sees how [the GSEs] presently sit. Again, [the GSEs] brought in private capital through risk sharing. Let’s say, they say, "Ok, you can no longer do loans above 80 LTV [loan-to-value]." You would really hurt the housing market, unless there was somebody willing to enter into that space. I don’t think you can really scale them back a lot. They may be able to nip at the edges, where they say we don’t want you doing the 97s [97 percent loan-to-value loans], but that is helping housing as well. I don’t think Trump is going to want to hurt housing. It is too significant a portion of the GDP, and he is all about getting the economy going.  

CHLA has been strongly advocating for a recapitalization plan. What would this plan look like and how long would it take to implement?

The idea here is that FHFA gets Fannie and Freddie to develop the plan. Rather than guessing, have them develop a plan. Granted, you are developing a plan for yourself for proper capital, so it is not like they can author it and you are done. They will be overseen by FHFA and probably by Congress. So, that is where you start, with a plan. Then it is really a math problem. Let’s say [the recapitalization plan does not allow an infusion of ] private capital and they are not going to do a secondary offering to bring in capital, and it is all about retained earnings. Then it is going to take 10 years. To me, I think the best plan is to develop a plan, do a secondary offering to bring in capital, so they can be released sooner.

Assuming that Congress won’t lead this effort with a big legislative package, what is going to be their role?

The oversight, to encourage FHFA and the Treasury to move forward with something. They don’t need to try to pass legislation. Really, they need to give FHFA and Treasury the nudge to create the plan and then start moving forward with it.

Do you believe that will happen? Or will the situation remain as it has over the last several years, with people talking about GSE reform, but it not really moving in any direction?

Well, again, in fairness to both DeMarco and Watt, they have moved in a direction. They have moved toward G-fee [guarantee-fee] parity. They have done credit-risk transfers. They have lowered the size of the balance sheet. All of these things were needed to be done in order for reform to work. So, they have gotten closer to what it would look like, in the form of what the director has mandated. The question now is, do you complete the job? You would complete the job by creating a plan to recapitalize them, and then figuring out how they would be released. To me, in an ideal world, they come up with a recapitalization plan. Congress looks at it, and says, "We are going to bless this," and actually votes on it. That would be the perfect world. I do think it is possible. 


Questions? Contact at (425) 984-6017 or

Get the latest news and articles from Scotsman Guide straight to your inbox.

Send me the following e-mails:

Learn more about Scotsman Guide e-mails

Thank you for signing up to receive e-mails from Scotsman Guide.

A confirmation e-mail has been sent to the address you provided.

For questions regarding your e-mail subscriptions please contact or call (800) 297-6061.

Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Follow Us:Visit Scotsman Guide Facebook pageVisit Scotsman Guide LinkedIn pageVisit Scotsman Guide Twitter page


© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy