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Milken: FHFA should pave way for housing reform

The influential Milken Institute has recommended that the Trump Administration clear a path for the government to end its 10-year control of Fannie Mae and Freddie Mac, but not release control over the government-sponsored enterprises (GSEs) until Congress addresses their “flawed charters.”

The think tank published a blueprint this week that calls on the GSEs' regulator, the Federal Housing Finance Agency (FHFA), to reduce Fannie's and Freddie’s footprint on the mortgage industry in several ways, while preparing the ground for multiple companies to enter the business of purchasing and securitizing loans.

gserefmilkenThe authors say Congress needs to pass legislation that creates a new system, which would include an explicit government guarantee on the securities issued by these entities. They oppose transitioning Fannie and Freddie back to shareholder-controlled companies, absent reforms that end the duopoly.

“Ending the conservatorship without further reforms would preserve flaws that allow the GSEs to privatize profits and socialize losses,” said co-author Eric Kaplan, director of housing finance policy at the Milken Institute Center for Financial Markets.

“We need to end the too-big-to-fail GSE duopoly,” Kaplan said. “Implementing our recommendations would help strengthen the housing finance system and pave the way for bipartisan legislation putting in place the last piece of the housing finance reform puzzle.”

The plan's other authors included Michael Stegman, a former senior policy advisor on housing for the National Economic Council; former Treasury official Phillip Swagel; and former Ginnie Mae President Ted Tozer.

FHFA is under new management this month. Joseph Otting, the Comptroller of the Currency, took over this week as acting director of the FHFA. Vice President Mike Pence’s chief economist, Mark Calabria, has been nominated for a five-year term, but his confirmation process could take several months.

Most analysts expect Calabria, and possibly Otting, to make moves that will shrink the size of the GSEs, which indirectly finance roughly half of the U.S. residential mortgage market and also bankroll a large chunk of the country's apartment market.  

The Milken authors recommended that the FHFA reduce the GSEs' footprint gradually, and do so via product restrictions rather than by reducing their loan limits. FHFA should prevent the GSEs from doing cash-out refinances or financing second-home purchases, and also shrink the GSEs' footprint in the multifamily space, the authors said.

Another key recommendation would suspend the GSEs’ dividends to the U.S. Treasury Department and allow the GSEs to begin building additional capital. Each GSE is allowed to retain $3 billion in capital reserves. The authors also say the FHFA needs to rethink its proposed capital rule for the GSEs, which was released this past summer. Fannie, Freddie and future entities need to hold enough capital to ensure they can withstand downturns without taxpayer bailouts, according to the authors.  

The report also recommends more transparency about how the GSEs price and subsidize loans to higher-risk borrowers.

Mortgage Bankers Association President Bob Broeksmit praised several of the recommendations, including those advocating transparent GSE pricing and data, as well as stronger capital-reserve requirements.

Broeksmit said MBA opposes “any proposal that would unnecessarily limit the ability for borrowers to use the equity in their homes, or finance a second home.” He also said MBA doesn’t favor allowing the GSEs to rebuild their capital reserves prior to Congress reforming the system, as that could hinder efforts to make legislative reforms.   


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