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Q&A: NAR exec talks GSE reform vision

Moving on from the conservatorship of Fannie Mae and Freddie Mac has been a much-discussed topic of late, with several groups pitching the next stage of the pair’s life cycle. On Thursday, the National Association of Realtors (NAR) released its vision on the future of the two government-sponsored enterprises (GSEs). Unlike some proposals that involve recapitalization and release, NAR’s vision suggests GSE reform in the form of a shareholder-owned regulated utility with a focus on “prioritizing and protecting a liquid mortgage market for Middle America and underserved borrowers alike.” Scotsman Guide spoke to Ken Fears, senior policy representative for conventional finance and lending issues, to learn a little more about the thinking behind this vision and what the group aims to accomplish with its recent proposal.

Ken FearsWhy does NAR prefer the regulated utility model versus some of the recap and release proposals that have been forwarded by other groups?

NAR firmly believes that reforming the secondary mortgage market must be comprehensive and have broad-based buy-in in order for it to last the test of time. To us, that means Congressional action is required, as is buy-in from industry and government stakeholders. What’s more, for the system to be resilient during times of stress and affordable at other times, the government’s guarantee, which only Congress can grant, is critical. Finally, NAR’s plan envisions a utility structure that is focused on the mission of supporting a national market in both good times and bad, continuously ensuring broad access for credit-worthy homebuyers. Though chartered, this mission-focus was corrupted in the old institutions and thus a new relationship between stockholders and the utility and, as a result, a new government charter may be required.

What are some of the core goals that the NAR identified when it started putting together its vision for GSE reform?

Our core goals include maximizing competition, protecting taxpayers and at the end of the day, supporting the mission of a national housing market with broad access for creditworthy homebuyers, particularly in the middle class and underserved groups. But also, one of our very high level goals was to create an entity that minimized volatility during the transition from the current state by recognizing many of the reforms that are already in place and building off of them.

Which existing reforms does the NAR feel most strongly about building from?

This really speaks to two things. One, in the wake of the crisis, a number of problems were identified. There were efforts to resolve them, and there were efforts to improve the way Freddie Mac and Fannie Mae do their business. We saw innovations in that the bar for the quality of loans and underwriting has been set higher. We also saw that the ways [Fannie and Freddie] can use their portfolio was defined and shrank. They’re not the hedge fund, essentially, that they used to be. We saw some of the rules around how they deal with counterparties — private mortgage insurers and servicers — adjusted, and we’re likely to see that going forward. We’ve seen refinements in the way they do their pricing, and most recently, proposals on how they should and shouldn’t hold capital. These are all very important.

We’ve also seen [the GSEs] do programs that have to do with underserved markets and nontraditional servicers. While we don’t necessarily have a particular position on each individual program, the point is that they should be experimenting on ways to make the infrastructure of the secondary market more liquid and more supportive of the national mission. It may not be ideal, the way they’ve rolled out some of these programs, but the idea is that they should be proactive going forward.

In this vision, NAR has been vocal in preserving and promoting competition in the secondary market. Talk about some of the structures that you see as already instrumental in that goal and how this vision seeks to improve them.

Competition is very important. We have many layers of economic agents in the secondary market. It’s not a monolith like a lot of people view it as. You have to first step back and ask: Where is competition reasonable in the market, and where should we focus our efforts to maximize that competition. There have been a lot of efforts around the number of guarantors and the structure of guarantors. But what we advance in this paper is that the real competition needs to be in the mortgage-backed securities market and the credit risk market. By making these products as viable as possible — and as standardized and as credible with investors — there will you will draw more demand in this market from investors. That flow, relative to stable demand in terms of homebuyers, will make the market more liquid. It will drop prices. It will make it more steady and resilient in stress periods.

That’s kind of our 10,000-foot view of how we look at it. Now, one of the things we feel is most important for that view is making the GSEs highly transparent, more so than they are today. If they’re going to be utilities and we’re not going to see competition, they need to be safeguarded against the opposite. They need to be very transparent and very well regulated so that investors see exactly what they’re getting and have confidence. The flipside of that is, taxpayers, in a sense, because of the government guarantee, are investors in this system, and they need that transparency and accountability as well.

Where does the NAR think the current model is seeing success?

From our perspective, Fannie and Freddie are really agents for the middle class market. That’s where the vast majority of lending in the United States is done, so it needs to be steady, stable, reliable and low-cost. One of the benefits of today’s market is the consistency. You get the same price for housing finance in Springfield, Illinois, as you do in Springfield, Massachusetts. It’s a national market. That’s working very well, and we’d like to see that going forward.

I want to emphasize that what this plan is trying to do is not create a whole new system. It’s canonizing what works well today in a structure that is resilient, brings in competition, protects the taxpayer, and keeps that mission front and center through all of it.

How does NAR propose to keep the balance of minimizing costs to consumers while maximizing access for the right borrowers?

One of the ideas is that the government guarantee and government support is critical to that. The government guarantee signals to investors that, at the end of the day, they will be made whole at the end of a crisis. The flipside of that is that you need to have very, very robust and deep markets for credit risk, whether it’s private mortgage insurers, reinsurers, or something else. There’s a lot of emphasis in this model placed on that transparency and accountability that’s going to attract more investors to those markets. It’s kind of the antithesis of what happened in the private label securitization market, where it was very chopped up — tens if not hundreds of different contracts and structures. In this case, we have very simplified, homogenized products in both credit risk and rate risk markets. With that standardization, investors have to focus on less.

I like to think of it this way, both in terms of mission and cost. The way Fannie Mae and Freddie Mac act should be like one of these big box stores. They buy in bulk and use that advantage to sell a handful of standard products at low cost. That’s what Fannie Mae and Freddie Mac are doing, and we want to maximize that process. We want to make sure they are the Costco of the mortgage market — a handful of good products at low, reliable cost to Middle America.

How important is private capital to the NAR’s reform vision?

Private capital is very important for a couple of reasons. For one, it casts transparency on the risks in the market. If there are risks that are not acknowledged, it will either raise the price or they’ll move away. That’s a concern from a mission standpoint, and you can address that in one of two ways. You can just not deal with private capital, but then you lose that economic benefit of competition and clarity. Or you can do it the other way, and that’s to use it to identify those risks and address the issues.

Obviously, having that private capital in place also reduces that political risk. When you have good, solid, accountable private capital, there’s less of a discussion on the fiscal side about bringing more in or bringing less in and what the government’s role is. It helps to create the correct market incentives, but it also helps to protect and insulate the mission, in a sense.

Under the vision that NAR has outlined, are there any particular areas of focus where you can diminish that volatility during the transition into more reformed GSEs?

The biggest hurdle is simply getting Congress to act. Again, at the end of the day, we need buy-in from both houses of Congress and both parties. If it’s going to be sustainable and durable, we need buy-in. We also need buy-in from the underlying groups that really drive this discussion, and that’s consumers and investors to want to share their money with homebuyers. We think our plan will have a strong appeal to both groups. We’re focused on protecting both and giving both as much stable transparency as possible.

Are there any particular differences between the NAR’s vision that are different from some of the others that have been recently proposed?

We think ours is probably one of the simplest to implement because it doesn’t involve a restructuring of the market. We’re taking the two entities as they are, acknowledging the reforms that have worked, and dealing with unresolved issues. Two of the ones we’re still wrestling with are how to bring in capital and creating an ownership structure that is focused on the mission. Simplicity is front and center while still finding solutions for key issues.

One of the secondary advantages is that we’re very focused on the two ends of this housing finance pipeline: investors and consumers. At the end of the day, it’s about connecting those two.

Lastly, I think because we have such a balance between our mission and bringing in competition, transparency and accountability, it can appeal to both ends of the political spectrum.


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