Back in the year 2000, when Franklin Raines held the title of chairman and chief executive officer of Fannie Mae, Rep. Richard Baker, R-La., sponsored the Housing Finance Regulatory Improvement Act. This bill not only asked for increased oversight over Fannie and Freddie but also recommended unifying the regulation of Fannie and Freddie under one roof.
Raines vehemently opposed the bill stating the Baker Bill would stifle home loan innovation. He further defended his opposition to the bill by telling Congress that the housing finance system works very well under its current structure. The bill ultimately died in the House Committee on Financial Services.
Fast forward 12 years and one enormous mortgage meltdown later, the subject of GSE reform returns. The old adage, “If we only knew then what we know now,” certainly holds true.
In January of this year, the idea of GSE reform was front and center at the American Securitization Forum in Washington. Additionally, in May at the National Secondary Market Conference held in New York, the MBA backed the idea of merging the two entities together to form one security platform.
With growing support across the country for GSE reform, the question bears asking: Would a merger of the two GSEs create yet another “too big to fail” entity?
We are still reeling from the recent JPMorgan Chase $2 billion hedging faux pas, which resulted with critics saying that the banking giant is just to big to manage. A GSE merger would result in a much larger behemoth with a combined portfolio size of approximately $1.5 trillion.
The real potential benefit of a GSE merger would be the potential cost savings of approximately $1.32 billion annually.
With a merged entity, regulators would only be required to oversee one company instead of two, and the many redundancies between the two entities would be eliminated. However, this reduction of redundancies would unavoidably include the estimated elimination of about 11,400 jobs, which would not make any politician very popular.
As in any merger, there are also potential negative impacts which must be weighed and examined.
As a merged entity, the new GSE would have the implicit backing of the government, resulting in the taxpayers still being on the hook for a bailout in the event of a future housing crisis.
In addition, the merger would need congressional approval to rewrite laws allowing the creation of a monopoly (although many speculate that they are already a monopoly since there is so much overlap between the two existing entities).
Whatever direction is taken determining the GSEs’ fate, it will not happen anytime soon. The GSEs play an important role in the recovery of the mortgage industry and our economy since they purchase 70% of all residential loan originations. They are key to our mortgage market so much so that any mistakes vis-a-vis a merger, nationalization, or privatization could affect mortgage liquidity making homeownership impossible for most Americans.
Hopefully, 12 years from now, the industry isn’t reflecting back and saying “woulda, shoulda, coulda…” because we won’t get another second chance to get it right.
Cheryl Lang is president/CEO of Integrated Mortgage Solutions, Houston.