GSE reform has been a hot-button topic ever since Fannie Mae and Freddie Mac came under government conservatorship during the financial crisis, but it’s one of those talking points that often seems heavy on the talk and light on the corresponding action. This week an assembly of analysts and think tanks, including the American Enterprise Institute, introduced a proposal outlining how President Trump could, at least theoretically, move to eliminate the GSEs without having to rely on Congressional support.
The plan hinges upon having a Trump-appointed head of the Federal Housing Finance Agency, the government organization tasked with overseeing the GSEs. The FHFA is currently overseen by Obama-era appointee Mel Watt, whose term will conclude at the end of this year. The new paper, which includes among its authors former Reagan White House Counsel and upcoming Five Star Government Forum Keynote Speaker Peter Wallison, argues that a Trump-appointed head of the FHFA could essentially whittle Fannie and Freddie down gradually. This process would involve limiting the types of loans the GSEs could purchase and lowering the size limits for those loans. The authors of the paper said they believed that the plan would allow President Trump to “break this logjam.”
Sen. Bob Corker (R-Tennessee) has recently been trying to advance bipartisan GSE reform legislation that would keep Fannie and Freddie intact, but would also include a government guarantee for mortgage-backed securities and provisions designed to support affordable housing initiatives. This latter part especially runs contrary to the approach of the new AEI proposal, as Wallison and others have argued that government affordable housing initiatives actually helped flood the market with subprime mortgages that destabilized the market and lead to the collapse of the housing bubble.
In a January op-ed for the Wall Street Journal, Wallison put it bluntly: “The trouble here is not merely that the Treasury is an outlier in what was supposed to be a deregulatory administration. It is also that the department’s current custodians appear to have learned nothing from the financial crisis, which was caused by precisely the policies they now support.”
The AEI paper argues that, rather than focusing on affordable housing mandates, government subsidies should be reduced, which they argue would bring down home prices and make homeownership available to a broader spectrum of Americans.
Not everyone would support such a plan, of course, with some proponents arguing that of Fannie and Freddie are in need of either moderate reform or minor policy adjustments. Moody’s Analytics Chief Economist Mark Zandi put it succinctly, telling MarketWatch that when it came to the GSEs, “it’s not fixed but it’s not broken.”
Last week California-based investment management firm PIMCO wrote in a letter to Congress that, “We believe GSE ‘reform’ should simply formalize the current state of affairs—namely, by making the government guarantee explicit and otherwise keeping Fannie and Freddie functioning as they largely are today. In other words, Congress should be honest about conservatorship: It has been and continues to be immensely successful, not to mention wildly profitable, and the current system works.”
According to a February survey conducted by the National Association of Federally-Insured Credit Unions, 73.3 percent of respondents opposed eliminating the GSEs and privatizing housing finance without a government guarantee. Moreover, 74.1 percent of respondents supported retaining the GSEs and the explicit government guarantee or replacing them with something similar.
You can watch the full archived stream of the AEI’s Tuesday conference discussing their GSE reform proposals below.