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GSE-reform hearings produce mixed bag of results

The winding road that could possibly lead Fannie Mae and Freddie Mac out of their government conservatorship continued this week with Sen. Mike Crapo, R-Idaho, holding two days of talks over his latest reform proposal.

CapitolBuildingCrapo, the chair of the Senate Committee on Banking, Housing and Urban Affairs, initially released his overhaul plans in February. Those plans are rooted in transitioning Fannie and Freddie into private companies that would act as guarantors for the timely repayment of principal and interest to investors of eligible mortgages. Those mortgages would be securitized through a platform operated by Ginnie Mae. Fannie and Freddie would be joined in a market by other private guarantors, with competition encouraged by placing limits on how many mortgages a single entity can guarantee.

It’s a pitch that, according to Crapo, “incorporates key elements of several housing-finance reform plans that have been advanced by thought leaders.” Indeed, several witnesses at the hearing voiced their support for all or part of Crapo’s outline, including Michael Bright, president and CEO of The Structured Finance Industry Group, and Vince Malta, president-elect of the National Association of Realtors. Robert Broeksmit, president and CEO of the Mortgage Bankers Association, called the multi-guarantor market “a strong foundation upon which to develop legislation.”

Both Democratic and Republican lawmakers praised Crapo for his efforts and agreed that the current state of conservatorship is unsustainable, but there was little headway made in terms of squaring the actual circle. Here are the biggest takeaways from the two days of reform discussion.

Competition raises concerns

Concerns were raised by witnesses at the two-day hearing over whether increased competition at the guarantor level would do more harm than good.

“While competitive markets are generally a good thing, competition can have deleterious effects in some circumstances,” said Adam Levitin, a financial-regulation professor at the Georgetown University Law Center who testified at the hearing.

“One needs look no further than Wells Fargo’s false account scandal," Levitin added. "The intense competitive pressures on Wells encouraged corner cutting and worse.”

Levitin’s apprehensions were echoed by Malta, who said that adding more guarantors “will not necessarily result in the type of perfect competition policymakers desire.” Instead, he said he was wary that adding guarantors “would likely result in an oligopoly like the Organization of the Petroleum Exporting Countries (OPEC), which does little to promote competition and drive down costs.”

Michael Calhoun, president of the Center for Responsible Lending, was also skeptical. A multi-guarantor model, he said, would exclude incentives to include key groups of borrowers and lenders, like small lenders, rural borrowers, low-income households and minorities.

“The new guarantors would have little oversight over whether they use the guarantee to further the public interest, and make responsible homeownership and affordable rental housing accessible to the full market,” Calhoun said.

Affordable-housing pressure point

While Crapo's plan proposes creating a market-access fund to offer grants, subsidies and other allowances for underserved borrowers, Calhoun argued that “it is unlikely that guarantors will act counter to their self interests and actively promote these loans without the regulatory oversight and lending requirements” in the current system.

Broeksmit’s testimony offered the findings of an MBA task force, which concluded that while access to funding should be a component of reform, there is a need for a “tangible, achievable set of affordable-housing obligations for guarantors.”

Indeed, Democratic senators pushed back on the plan due to its perceived lack of accountability toward underserved groups. The market-access fund, they said, wouldn’t be an adequate replacement for the affordable-housing goals and Duty to Serve requirements that the Crapo plan would eliminate.

“Failure to put working people first in this process will only make it harder for families to afford rent or to buy a home; put the viability of the 30-year fixed-rate mortgage at risk; and hit lower-income communities, communities of color and rural Americans particularly hard,” said Sen. Sherrod Brown, D-Ohio, the ranking member on the Senate banking committee.

“The outline does not address the costs that families all across this country — black, white and Latino, urban, rural, Republican, Democrat — face,” said Sen. Elizabeth Warren, D-Mass. “And unless we set some real goals and put some real resources into doing this, we’re not going to make the change.”

Duty to Serve dilemma

Republican legislators, however, questioned whether the government-sponsored enterprises' existing Duty to Serve regulations could coexist in a system that relied on competition between multiple guarantors.

“If we mandated a nationwide duty to serve, doesn’t that potentially discourage some potential entrants to the market?” Sen. Pat Toomey, R-Pa., asked.

Housing Policy Council President Edward J. DeMarco, another witness at the hearing, concurred, calling Duty to Serve a “barrier to entry” that “creates unintended consequences.”

DeMarco said that the “hybrid model” proposed by Crapo is not only feasible, but also “that it reduces the systemic risk associated with the current Fannie Mae/Freddie Mac duopoly.” New market entrants, he said, would enhance innovation, introduce market discipline and end "too-big-to-fail" bailouts.

Common ground

Despite the gulf that remains, stakeholders and lawmakers on both sides found some mutual agreements.

The preservation of the government-sponsored enterprises and their role in the modern mortgage market was met with commendation all around. Greg Ugalde, chairman of the board of the National Association of Home Builders, praised Crapo’s outline for bucking initial reform plans that called for winding down Fannie and Freddie altogether.

Stakeholders also appeared consistent in the belief that recapitalizing Fannie and Freddie, then releasing them from conservatorship, is a flawed approach.

“I’m glad to hear such consensus around recap and release would be a disaster,” Sen. Mark Warner, D-Va., said.

The subject “should not even be on the table for discussion,” DeMarco added.

Mark Zandi, chief economist at Moody’s Analytics, said that such a move would be “going back to the future of the system we had before the crisis.”

“It’s just a duopoly like we had before,” he added. “Maybe more highly regulated and more highly capitalized than before, but they have the same incentives to make the same errors and mistakes they made in the past.”

Zandi, in his testimony, suggested critical issues that would need to be addressed, but said that the proposed overhaul offers “a promising framework” to start from. If those issues can be resolved, he said, “the remaining challenges are manageable.”

“Chairman Crapo’s outline thus holds significant promise,” Zandi said, “making it a worthy place to renew the much-delayed, but still badly needed, effort to overhaul the housing-finance system.”


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