Federal Housing Finance Administration (FHFA) Director Melvin L. Watts told the U.S. Senate Committee on Banking, Housing and Urban Affairs that “Congress urgently needs to act on housing finance reform” and bring Fannie Mae and Freddie Mac out of receivership after almost nine years.
Conservatorship is temporary by its very nature. There is universal agreement that it can’t go on forever, but there is widespread disagreement about what the government-sponsored entities (GSEs) should look like after coming out of conservatorship – and how to get there.
“Only a legislative solution can provide political legitimacy and long term market certainty for the housing finance system,” according to a recent Mortgage Bankers Association (MBA) white paper on GSE reform. MBA President and CEO Dave Stevens said now is the time for Congress to tackle the changes that will maintain liquidity, but protect taxpayers and homebuyers.
“The last recession destroyed many communities throughout the country,” he said. “The GSEs played a large role in that. They fueled a lot of the capital that allowed all varieties of lenders to make risky loans and then received the single-largest bailout in the history of this nation. They are not innocent.”
The National Association of Realtors also calls on Congress to “responsibly reform the secondary mortgage market to ensure that the qualified borrowers have access to safe, affordable mortgage financing,” according to a statement.
Taxpayers Need Protection
“There’s going to be change no matter what,” Stevens said. “We’re stuck with this problem. It’s technical and complicated and needs to be done. They can’t stay in conservatorship forever.”
The theme of the MBA’s proposal to reform Fannie Mae and Freddie Mac is to ensure that crashes like the one in 2007-2008 never happen again, in part by raising the minimum capital balance GSEs have to maintain to a level at least as high as banks and other lenders.
“They have a capital standard that is absurd,” Stevens said. “Pre-conservatorship they had to have less than 0.5 percent capital. Banks are required to maintain 4 percent of their loan value against mortgages. That’s a regulated standard. Fannie and Freddie are not as diversified as banks are. Our view is to make sure they are sustainable, they should at least a 4 to 5 percent buffer to protect them against failure.”
Too put that into context, a 3.5 percent buffer would have been just large enough for the GSEs to weather the last housing crash without the need for a taxpayer-funded bailout. Stevens said the MBA would go even further.
“They should also pay a fee for every loan that goes into an insurance fund in the event all else fails,” he said. “In the event of a catastrophic failure, that would be the last barrier before having to rely on taxpayers. Keep in mind: for years, shareholders made billions and when they failed taxpayers took 100 percent of the losses.”
NAR goes even further. In a letter to members, the advocacy group says Congress has proposed increasing these fees to pay for other government spending. NAR urged its members to call their legislators and “strongly oppose the use of g-fees for any use other than housing.”
Stevens said the MBA would like to see more competition in the secondary market, and that the current duopoly isn’t much better than a monopoly.
“There should be more competitors,” he said. “If either one fails, you almost have to bail them out. Our goal is to have a highly regulated industry to support the American finance system without using the portfolio to make bets on the marketplace.”
A Bipartisan Issue
While some conservatives like Rep. Jeb Hensarling (R-Texas) have called for getting the government out of the mortgage business altogether, Stevens said that would likely mean the end of the 30-year, fixed-rate mortgage.
Furthermore, GSEs are required to serve underserved communities. Private companies would be more likely to back the most profitable loans.
“The GSEs play a really important role in counter-cyclical markets,” Stevens said. “When credit conditions shift, private money disappears. We saw that in 2007. It put extraordinary demands on Fannie Mae, Freddie Mac and Ginnie Mae. You need a continuous flow of capital. You can put controls in place so it can expand and contract when needed.”
Eliminating the GSEs would also disproportionately affect first-time home buyers, a vital cohort in the overall housing picture.
“It would result in what we see in western Europe,” Stevens said. “In England, there was such a shortage of capital for first-time homebuyers that the government had to step in. They help keep our economy sustained in off economic cycles. We need a commitment toward sustainable affordable housing where it makes sense. Private entities don’t do that.”
NAR agreed and urged members to tell their legislators, “Do not dismantle these entities [Fannie Mae and Freddie Mac] without identifying a viable replacement or omit an explicit federal guarantee. These components are critical to safeguard the 30-year fixed-rate mortgage and ensure families are not shut out of homeownership.”
Despite President Donald Trump’s highly publicized vows to roll back financial regulations, a famously gridlocked Congress, and the fact that the popular 2014 Johnson-Crapo Bill never even made it to the Senate floor, Stevens is optimistic that GSE reform could soon become law.
“We think ours is a pretty simple model,” he said. “We’ve been talking about this with the Trump Administration and with Congress. It’s interesting, members on both sides of the aisle think this is less politically charged than most proposals. This is one they could actually work on. It should have been resolved during the Obama Administration.”
“We’ve learned a lot of really valuable lessons from the recession,” he said. “Our plan for GSE reform is to protect liquidity, insulate taxpayers, preserve the duty to serve underserved communities and protect the 30-year mortgage. Those aren’t partisan issues.”
