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Senate Republicans float Fannie/Freddie exit plan

The chairman of the Senate Committee on Banking, Housing and Urban Affairs signaled that housing-finance reform will be a priority of Republicans in 2019.

Sen. Mike Crapo, R-Idaho, on Friday released a three-page outline of a plan that would clear a path for Fannie Mae and Freddie Mac to eventually exit their 10-year-old federal conservatorship as private companies, replacing it with a system in which multiple regulated entities buy, guarantee and securitize mortgages.

gsecraporeform(1)The federal government —and thus, American taxpayers—would ultimately continue to back 30-year, fixed-rate mortgages issued by these companies by providing an explicit government guarantee on the securities. The plan, however, envision putting the government on the hook for losses only during exceptional, catastrophic downturns.

Crapo’s move was noteworthy because he controls the committee most likely to produce a workable GSE-reform bill. Most Washington, D.C., insiders believe that a viable, bipartisan plan is most likely to first come out of the Senate banking committee.

The Mortgage Bankers Association (MBA) President Robert Broeksmit praised the outline as “a significant sign” of Crapo’s commitment to reform. He also noted that it adopts some of the main features of MBA’s reform plan. MBA’s plan, for example, calls for multiple guarantors that would break up a duopoly of too-big-to-fail enterprises, and foster competition. 

GSE reformers in Congress face high hurdles ahead, however. Small banking trade groups generally oppose the concept of multiple guarantors.Civil rights and consumer advocacy groups are against plans that greatly change the current system that has established fixed goals for affordable housing.

Community Home Lenders Association Executive Director Scott Olson praised Crapo for rebooting the discussion, but said his non-bank members were still against increasing the number of GSEs.

Reform proposals sputtered during the first two years of the Trump administration, when Republicans controlled the executive and legislative branches of the government. GSE plans also failed during the last years of the Obama administration, when the GOP controlled the House and the Senate. Any plan that emerges from the Senate banking committee must also win over the  House Financial Services Committee, chaired by Rep. Maxine Waters, D-California.  

“I think that is still a pretty heavy lift to get done,” said Moody’s Analytics Chief Economist Mark Zandi. “You still have the same problem that you have many stakeholders that are really comfortable with the status quo, and don’t want to make any changes unless they are absolutely sure that what they get out of it is not only as good as the status quo, but better,” Zandi told Scotsman Guide News during an interview on Friday.

“That is a pretty physical circle to square.”

Crapo’s outline was similar to a bipartisan proposal floated last year by Sen. Mark Warner, D-Virginia, and former Sen. Bob Corker, R-Tennessee. That plan was released as a discussion draft and was never formally introduced as a bill. The Crapo outline, as with Corker-Warner, calls for a greatly expanded role for Ginnie Mae. Ginnie would run the securitization platform, and back the securities through a new insurance fund.

The plan also would restructure the GSE regulator, the Federal Housing Finance Agency (FHFA), so that it is overseen by a bipartisan commission. FHFA would retain wide regulatory powers over Fannie/Freddie and other guarantors, including the oversight of their prices.

The plan also signaled that Republicans want to limit the size of the GSEs by imposing caps on the percentage of mortgages they can guarantee, and ensure they are capitalized at an acceptable level to cover losses.  

A number of details were left blank in the outline, including the caps on the size of the GSEs, and capital levels. The outline also provides no timeline for the exit.

Crapo’s outline also calls for the GSEs' multifamily businesses to be sold and operated as private companies.      


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