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GSE conservatorship hits a decade, and counting

The 10-year anniversary of the government’s takeover of the Fannie Mae and Freddie Mac was marked by another call from the industry urging Congress to get moving on housing-finance reform, and also a new bill has been introduced in Congress that proposes to do away with the government-sponsored enterprises (GSEs).

U.S. Reps. Jeb Hensarling, R-Texas, and John Delaney, D-Maryland, introduced the discussion draft of a bill that would repeal the GSE charters within five years of the bill’s passage and eventually wind them down, while greatly expanding the role of Ginnie Mae.

gseanniversaryThe plan envisions a system where private, regulated, “credit enhancers,” with several capital sources at their disposal, guarantee qualified 30-year fixed mortgages at the loan level. Remnants of Fannie and Freddie would likely be reconstituted as credit enhancers without special advantages. These loans would then be securitized and wrapped with a government guarantee provided by Ginnie.

The bill also proposes ways to preserve the GSEs’ affordable-housing targets, and protections for small lenders to ensure they could compete to make mortgages on an equal footing.

The GSEs were placed in conservatorship on Sept. 6, 2008, after nearly going under in the wake of the financial crisis. The House and Senate have taken a few stabs at reform, but none of the legislation has gained traction. 

Hensarling, who is retiring from Congress and the outgoing chairman of the House Financial Services Committee, also said he was going to reintroduce the PATH Act as a symbolic gesture. That bill, which he authored five years ago, would eliminate the GSEs and largely end the government’s role in the mortgage market.

“Regrettably, its chances for passage remain slim,” Hensarling said in his opening remarks at the Financial Services Committee hearing on the GSEs Thursday. “So as an alternative, I’ve decided to partner with Mr. Delaney on the other side of the aisle to propose a bipartisan compromise housing-reform plan that preserves the government guarantee in the secondary mortgage market.”

During that hearing, members of both parties bemoaned the 10-year anniversary of the government’s conservatorship, but many Democrats strongly oppose eliminating the GSEs or altering the current system greatly.

Ed DeMarco, the former acting director of the Federal Housing Finance Agency (FHFA) and a possible successor to current FHFA Director Mel Watt, in testimony, warned about the riskiness of having a mortgage market dependent on the decisions of two massive entities. The Hensarling-Delaney bill is partially modeled on a plan coauthored by DeMarco and Michael Bright, the chief operating officer at Ginnie Mae and President Donald Trump's nominee to lead Ginnie as president.  

"The systemic reliance that we are placing on Fannie Mae and Freddie Mac, if anything, has grown in these 10 years,” DeMarco said. He said Congress needs to focus on the problem of creating a viable market based on capital, equitable rules and transparency. He said that Fannie and Freddie are essentially calling the shots for the entire market, but he noted there is some common ground on how to reform the system.

“We need Congress to make the policy decisions that only elected officials can make,” DeMarco said.  

Meanwhile, a coalition of 29 housing- and banking-industry groups, including the National Association of Realtors and the National Association of Home Builders, sent a letter to the Trump administration and Congress urging action on GSE reform. These groups included banking groups that have sometimes been on opposite sides of the debate over specific GSE reform plans, such as the Mortgage Bankers Association, the Independent Community Bankers of America, the Community Home Lenders Association and the Community Mortgage Lenders of America.

That letter urged a measured approach to reform “over a sensible time horizon.”  

“Reforms should reflect a pragmatic understanding of the market and the mechanisms by which credit is delivered,” the letter said. “Housing is simply too important to our national economy and our local communities to risk disruption of the system by which it is funded.” 


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