A new bipartisan push to reform Fannie and Freddie is afoot in Washington, and local lenders are cautiously optimistic about its chances.
“Something needs to be done,” said Debbie Sousa, executive director of the Massachusetts Mortgage Bankers Association (MMBA). “We’ve been in this limbo of receivership for five years now, and that itself can cause a little bit of unrest.”
Following the 2008 market collapse and the government takeover of Fannie Mae and Freddie Mac, politicians on both sides of the aisle seemed to agree on one thing: The entities needed to be reformed so that no such future bailouts would be required.
However, Democrats and Republicans disagreed strongly on how to reform them, with Democrats generally supporting maintaining a prominent role for the federal government in the housing market in order to ensure mortgages would remain affordable for low- and middle-class Americans while many Republicans called for the outright elimination of Fannie and Freddie and a return to a purely private market.
Recently, however, a bi-partisan bill has been put forward by Sens. Bob Corker (R.-Tenn.) and Mark Warner (D.-Va.) that aims to phase the two entities out over five years. Based on a proposal first put forward by the Bipartisan Policy Center, the bill has already attracted support from both sides of the aisle, including U.S. Sen. Elizabeth Warren.
“We’ve seen the market finally start to recover in housing, and we think it’s a good time to set up a new architecture,” Corker told Bloomberg News.
The Corker-Warner bill calls for the government-sponsored entities to be wound down. Instead of purchasing mortgages directly from lenders and securitizing them as Fannie and Freddie now do, the government would instead offer a form of mortgage re-insurance. Private investors would provide the purchase funds and be on the hook for the first 10 percent of any losses in the underlying loans. In the event of a widespread downturn or market crash, the government reinsurance would then kick in to prevent a total wipeout. The reinsurance funds would be provided through guarantee fees, similar to how Fannie and Freddie work today, and safeguarded from any tampering from Congress.
No Going Cold Turkey
Local lenders appear cautiously optimistic about the plan. James Murphy, managing director of commercial and multi-family lender NorthMarq Capital, agreed that phasing out government support for Fannie and Freddie while leaving an insurance backstop seemed like a sound plan.
But he warned that any transition from the current set up should be gradual. “To go cold turkey and eliminate Fannie and Freddie would be devastating to the multi-family world, because between them they provide over 50 billion dollars in financing,” said Murphy. “It’s a gap that would be hard to fill from conventional sources.”
Carol Bulman, CEO of Jack Conway & Co., which has its own lending arm, has similar concerns on the residential side.
“There is a need to have a reformation of the GSEs. But it’s got to be done very carefully. Because if it’s not done carefully, the consumer will be the one who is hurt the most,” said Bulman. “It’s a real balancing act, and I think there’s a big job in front of the government, to unravel this a bit so that they don’t have so much control [of the market].”
The Obama administration has already come out in favor of the Corker-Warner bill, and industry groups like the MMBA and the national Mortgage Bankers Association have also announced support. But its fate remains uncertain.
In recent months, some heavy hitters on Wall Street have pushed for a different outcome: Simply re-privatizing the entities. Both Fannie and Freddie have returned to profitability, turning in $66.3 billion in dividend payments to the government so far this year. Combined, the two have already handed over profits equally to more than two-thirds of the bailout funds provided by Uncle Sam, with Fannie has repaying $95 billion of the $116 billion it received, while Freddie has repaid about $37 billion of its $71.3 billion. Numbers like that have attracted attention on Wall Street, sending their formerly worthless common stocks soaring to over $5 per share for a brief period in May.
Whatever the outcome, everyone seems to agree on one thing.
“Uncertainty is not a good thing for the marketplace. The sooner people understand where they’re headed, the sooner people can adjust their business plans,” said Murphy.
Email: csullivan@thewarrengroup.com
