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Residential Department: The FinePrint: March 2011


The FinePrint

GSEs: Where's the Reform?

As most mortgage brokers likely recall, when the mortgage crisis first broke in 2007, it was confined to the subprime market. Many industry experts indicated that the overall housing market would survive the fallout from subprime losses.

As the crisis developed, however, the greater role of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac within the subprime and alternative mortgage market became more evident. The discussion began to focus on fundamental assumptions about the makeup of the U.S. housing market and the role of the government within it.

We all know the results of the mortgage and economic crisis. Among them, there was: economic recession; massive losses in home values, family assets and institutional assets; the ongoing foreclosure crisis; large- and small-bank closures; billions of dollars in federal support in numerous areas; and extensive regulatory overhauls.
The regulatory changes have been piecemeal and include the Secure and Fair Enforcement for Mortgage Licensing Act; Real Estate Settlement Procedures Act reform; changes to loan-originator compensation; and Housing and Economic Recovery Act Regulations on underwriting standards. And more are coming. Surprisingly, though, the various changes have not yet addressed the more-fundamental issues of GSE reform and the role of the federal government within the housing market.

The GSEs have cost the U.S. Treasury Department and taxpayers about $134 billion and growing. And within the Dodd-Frank Wall Street Reform and Consumer Protection Act was a deadline of January 2011 for the Treasury to put forward a proposal for the future of the GSEs. At press time, that proposal had not yet been published, although it was expected in mid-February.

Essentially, the federal government is reconsidering the future makeup of U.S. housing, including its role in encouraging and supporting homeownership, and the future of Fannie Mae and Freddie Mac. This started in 2008, when the Bush administration put Fannie and Freddie into conservatorship. This past July, the Obama administration issued a statement that "the current structure of the government's role in the housing finance market is unsustainable and unacceptable" as it announced a conference on the future of housing finance.

Although that conference was held this past summer, little was publicized about its conclusions. And the bigger debate about GSE reform and U.S. housing policy was missing from the mainstream press's coverage of this past fall's elections and the Dodd-Frank financial-reform legislation.

The U.S. housing-policy debate should be more center stage this year. The discussion about home interest-tax deductibility is typical of the questions regarding the government's role, a role that has been gaining public attention given the push for balancing the federal budget.


Richard Smith is a loan originator with Churchill Mortgage in Chattanooga, Tenn. He had been the retail manager with American Acceptance Mortgage Inc. for 15 years. He lends in Tennessee and Georgia. He has originated government, conventional and jumbo loans since 1994. Smith writes a monthly column on regulatory and legislative issues for Scotsman Guide. Reach Smith at (423) 899-6898 or at Visit for more information.

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