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Residential Department: The FinePrint: April 2011


The FinePrint

Digging deeper into GSE reform

In last month’s FinePrint column (, I wrote about the government’s yet-to-be-announced proposals for housing reform. Since then, the administration’s proposal was released with the title, “Reforming America’s Housing Finance Market."

I think the title understates its coverage. The report calls for massive change in housing and goes beyond offering measures to correct abuses.

The proposal would wind down government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and refocus the Federal Housing Administration (FHA) to “provide greater support for rental housing,” expanding “FHA’s capacity to support lending to the multifamily market."

Its guiding principles are to reduce the government’s role in home finance and in encouraging homeownership, to target resources to underserved markets, to expand support for affordable rental housing, and to increase regulatory control and consumer protections.

The plan is sweeping and — at least for me — troubling. Homeownership remains a foundation of community and family stability and wealth. Done right, it deserves and repays the support our government provides.

The proposal discusses the history and causes of the housing crisis. First listed are predatory-lending practices by “unregulated brokers and originators."

It seems like the administration has found small-business mortgage originators to be an easy scapegoat for the housing crisis, as it is pointing the blame at originators for offering complex mortgage products and “steering” borrowers who may have been qualified for more-affordable terms into high-cost loans.

The administration’s proposals go far beyond correcting such abuses, real or imagined, however.

Continuing to review the history and causes of the crisis, the paper cites regulatory inadequacies, complex securitization vehicles, capital requirements and an ill-equipped servicing industry. It also addresses failures with Fannie and Freddie.

I think here the administration has identified an essential cause — that “Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits.” In fact, the decision to stray from their core business was done with the full knowledge of Congress, and, I assume, congressional consent.

That core business was conventional lending. The GSEs’ role was to maintain liquidity in the housing markets, provide industry benchmark standards, help reduce interest rates and expand homeownership responsibly.

For decades, the GSE model for home finance provided stability, efficiency, innovation and affordability in the strongest housing market in the world. We must return to that model, not “wind it down” as the administration and others propose.


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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