Everyone on Capitol Hill says something should be done to fix the housing finance system. And there seems be a general consensus that Fannie Mae and Freddie Mac should eventually be shut down.
But trying to find a replacement for the two government-sponsored enterprises has become the big stumbling block. The GSEs have been in conservatorship since September 2008. And after a long slog, Fannie and Freddie are generating profits again.
They still control nearly 70% of the mortgage market. And it is going to be harder to change their government charters as they start paying back the U.S. Treasury for covering their losses. The two GSEs currently owe Treasury over $140 billion.
Despite the inertia on GSE reform, the president and chief executive of the Mortgage Bankers Association, David Stevens, believes it time for Congress to finally map out a future for the housing finance system.
A Bipartisan Housing Commission recently issued recommendations for gradually winding down the GSEs so that private capital can re-enter the mortgage market. Co-chaired by former Sens. Christopher Bond and George Mitchell and former HUD secretaries Henry Cisneros and Mel Martinez, the commission issued its report Feb. 15.
They recommend a gradual reduction in loan limits and increasing guarantee fees to wind down Fannie, Freddie and the Federal Housing Administration’s grip on the mortgage market.
The creation of a “Public Guarantor” would assume secondary market functions of the GSEs. This new entity would act more like Ginnie Mae as a backup. The utility would be forced to pay claims in cases where the MBS issuer and mortgage insurer have met their loss obligations.
“It would put the government in the position of being a catastrophic risk insurer,” Martinez said.
MBS issuers would pay an explicit fee for that guarantee and the credit box would be regulated to ensure high-quality loans.
The MBA chief executive hopes lawmakers will give the commission’s recommendations serious consideration.
“This can be a blueprint to give Congress some momentum to work together and try to provide a new structure” Stevens told NMN. “It would be a shame to let that go to waste,” he added.
Meanwhile, the GSE regulator is forging ahead with a plan to merge Fannie and Freddie’s securitization operations.
Federal Housing Finance Agency acting director Edward DeMarco has tasked Fannie and Freddie with building a new securitization platform that could one day serve as a public utility for the issuance of MBS.
The GSEs would finance and initially own the securitization platform. But eventually the platform would be independent of Fannie and Freddie and have its own chief executive and board of directors, according to DeMarco.
But the MBA chief executive contends such a platform should be put off until there is a real plan that maps out the future of Fannie and Freddie.
This platform could be a “great opportunity,” Stevens said, if it becomes an industrywide utility and Fannie and Freddie are not the owners.
The MBA is waiting for the GSE regulator to provide the full details of how this platform will be structured. “More transparency” from the FHFA and the GSEs is needed before the MBA can support it, he said.
Meanwhile, the MBA has created a task force to re-evaluate the trade group’s approach to GSE reform and come up with transition plans.
Stevens noted the MBA proposal will be similar to the bipartisan commission’s proposal. However, the transition plans will provide “more detail on how you get there,” Stevens said.
In December, the MBA tapped BB&T chairman Timothy Dale to chair the task force.
“The oversized government role in the residential market, and the uncertainty surrounding Fannie and Freddie, has created an unhealthy and unsustainable mortgage market,” Dale said.
