Keeping Fannie Mae and Freddie Mac as-is? That’s no longer an option according to Sen. Mike Crapo (R-Idaho). Crapo, who currently serves as Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, said as much in his opening remarks at the committee’s Principles of Housing Finance Reform hearing earlier today.
According to Crapo, the “status quo is not a viable option.”
“Fannie and Freddie are currently earning profits, but if the housing market experiences a downturn, and at some point, it will, taxpayers could again be on the hook for many billions of dollars,” Crapo said during his remarks. “Reform is urgently needed, and the Committee is actively exploring a variety of options.”
There are several principles, according to Crapo, that will guide the committee’s path toward reforming the GSEs. These include preserving an affordable 30-year fixed-rate mortgage, creating multiple levels of taxpayer protection, attracting strong capital, ensuring a level playing field for smaller lenders, and utilizing the existing infrastructure whenever possible.
“We need multiple levels of taxpayer protection standing in front of any government guarantee, including down payments, loan-level private insurance, and substantial, robust, loss-absorbing private capital at guarantors comparable to the amount of capital maintained by global systemically important banks,” Crapo said. “Strong capital is essential to ensure that guarantors and other market participants can withstand market downturns. We must ensure that small lenders have a level playing field when accessing the secondary market.”
Additionally, Crapo said the Committee will work to preserve Fannie and Freddie’s existing multifamily programs in some form. These, he said “performed well through the crisis and already involve meaningful risk-sharing with the private sector.”
The Committee is also considering other concepts, including “securitiz[ing] conventional mortgages with a Ginnie Mae wrap,” Crapo said.
Edward J. DeMarco, President of the Housing Policy Council of the Financial Services Roundtable and one of three witnesses who addresses the Committee today, recently co-authored a paper detailing how that would be done.
“The approach to reform that HPC supports, and that is reflected across most reform proposals, provides for a single MBS that has an explicit catastrophic backstop federal guarantee to replace the separate MBS issued by Fannie Mae and Freddie Mac that carried an ‘implied’ guarantee,” DeMarco said in his testimony. “A common platform would be used to issue these securities and place the federal guarantee. Multiple private entities would be able to add loans to the common pool. This is how the Ginnie Mae securitization process works today.”
Two other witnesses also addressed the committee: Michael D. Calhoun, President of the Center for Responsible Lending; and David H. Stephens, President and CEO of the Mortgage Bankers Association.
According to Crapo, the Committee may also examine the Federal Housing Administration, as well as its role in the overall housing finance system. The FHA may need reform in order to establish a new system, he said.
“A housing finance system dependent on two government-sponsored enterprises in perpetual conservatorship is not the solution,” Crapo said. “Recapitalizing the enterprises and releasing them back into the market without significant reforms is also not a solution. The current system is not in the best interest of consumers, taxpayers, investors, lenders, and the broader economy.”