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GSE reform returns to Capitol Hill

Lobbyists for major housing and banking trade groups on Friday spoke in favor of a bipartisan House proposal that would wind down Fannie Mae and Freddie Mac and create a housing-finance system with multiple private guarantors and a greatly expanded role for Ginnie Mae.

In the last gasps of 2018, the House Financial Services Committee called witnesses to express opinions on the Bipartisan Housing Finance Reform Act, which was introduced as a discussion draft on the 10-year anniversary of the government’s takeover of Fannie Mae and Freddie Mac in September.

gserefThe draft proposal itself, which was authored by Chairman Jeb Hensarling, R-Texas; John Delaney, D-Maryland; and Jim Himes, D-Connecticut, has an uncertain future. Hensarling and Delaney are retiring from Congress. Some Democrats at the hearing said the proposal lacks detail and doesn’t go far enough to protect affordable housing and access to credit for lower-income borrowers. 

Any progress on a House bill also will have to move through Rep. Maxine Waters, D-California, who will take over as chair of the committee in January.

Friday’s hearing was significant, though, in that it was the first discussion on housing-finance reform in months and some of proposal’s central ideas may be included in a comprehensive bill next year. Fannie and Freddie bankroll the nation’s most popular loan types, and also finance a huge portion of the multifamily market, especially affordable apartments.

In his final act as chairman, Hensarling warned that if Congress doesn’t take up housing-finance reform, the incoming director of the Federal Housing Finance Agency (FHFA) will have the power to unilaterally shape policy for the next five to 10 years. The White House has signaled that President Donald Trump will nominate conservative economist Mark Calabria to be the next permanent FHFA director. In the interim, Joseph Otting, the Comptroller of the Currency, has been named as acting director of the FHFA as of Jan. 6, when current FHFA Director Mel Watt’s term ends.

“Simply put, reforming our broken GSE model is the right thing to do and now is the right time to do it,” Hensarling said.

Representatives from the Mortgage Bankers Association (MBA), National Association of Realtors and National Association of Home Builders spoke favorably of several of the draft’s core ideas.

MBA President Robert Broeksmit called it “a strong step forward.”

“The 2008 financial crisis exposed fundamental problems in the GSEs’ business models, as well as weaknesses in the regulatory framework in place at the time,” Broeksmit said. “Ten years later, we have still not determined how or if the GSEs will be reformed,” he said. “Only by enacting comprehensive legislative reform can we realize the full benefits of a diverse, competitive primary market and a vibrant, liquid secondary market. Reform should proceed without delay.”

Small banking interests don’t favor a comprehensive overhaul of the system that would eliminate Fannie and Freddie. The Independent Community Bankers of America and the Community Home Lenders Association, as well several civil rights and low-income advocacy groups, favor keeping the system essentially the same, but having Congress codify many of the recent internal reforms to Fannie and Freddie that have been undertaken since they were taken over by the government.

The proposal calls for repealing the charters of Fannie Mae and Freddie Mac and winding them down. In the new system, private “credit enhancers” would carry out many of the functions that Fannie and Freddie perform now, which include purchasing single-family mortgages, providing a loan-level guarantee and securitizing them for sale to end investors. The securities issued by these new companies would be guaranteed by Ginnie Mae, which currently insures the securities underpinned by government loans. These new entities would be capitalized and overseen by a strong regulator.

The proposal also calls for the government to provide an explicit government guarantee, but taxpayers would only be on the hook for catastrophic losses. Ginnie would be separated from the U.S. Department of Housing and Urban Development and become an independent agency under the proposal. 


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