Last year when top Treasury officials such as Secretary Jack Lew and Counselor Antonio Weiss publicly stated that Fannie Mae and Freddie Mac will not be recapitalized and released from conservatorship during the Obama Administration, GSE reform took a back seat to other issues for a while.
The mortgage industry began to buzz in February, however, when FHFA Director Mel Watt declared in a public address at the Bipartisan Center that there were certain substantial risks and challenges associated with managing the conservatorships, which were “certain to escalate” as the conservatorships, now in their eighth year, continue. One of those risks was the capital buffer of Fannie Mae and Freddie Mac, which is required by the government to be reduced to zero by January 1, 2018. Watt said with Fannie Mae and Freddie Mac holding zero capital, a disruption in the housing market could result in the GSEs needing another draw on Treasury.
Treasury issued a response to Watt's speech stating that a recap and release of the GSEs was not imminent, the subject of GSE reform remains a hot one within the industry. Earlier this week, a white paper titled “A More Promising Road to GSE Reform” written by Jim Parrott (senior fellow, Urban Institute), Lewis Ranieri (chairman, Rainier Strategies), Gene Sperling (former director, National Economic Council), Mark Zandi (chief economist, Moody’s Analytics), and Barry Zigas (director of housing policy, Consumer Federation of America) was released. In that paper, the authors contend that a government corporation titled the National Mortgage Reinsurance Corporation (NMRC) would replace Fannie Mae and Freddie Mac and would perform the same functions as the GSEs do currently—it would purchase conforming single-family and multi-family mortgages and issue securities backing the loans through a single issuing platform operated by the NMRC—but unlike the GSEs, would be required to transfer all non-catastrophic debt risk on the securities it issues to a broad range of private entities.
Perhaps the most important difference between the NMRC and the current GSEs is that the NMRC “would be motivated neither by profit nor market share, but by a mandate to balance broad access to credit with the safety and soundness of the mortgage market.”
Unlike the administration, which has been adamant about putting the issue of GSE reform on the back burner, the authors of the paper noted the urgency of the situation, saying the FHFA is helping Fannie Mae and Freddie Mac “tread water” and that “the situation is not healthy.” The authors also echoed Watt’s sentiments from the February Bipartisan Center speech, saying “the longer it takes, the riskier it gets” and “let’s not wait until the next crisis” to restart the discussion on GSE reform.
NAHB Chairman Ed Brady, a homebuilder and developer from Bloomington, Illinois, praised the white paper and concurred that the situation is more urgent than the current administration “The strategy released today is a thoughtful, serious proposal that contains a number of elements along the lines of a white paper released by NAHB last year. We believe that any plan must transition Fannie Mae and Freddie Mac into a private-sector oriented system where the federal government’s role is clear, but its exposure limited. Both plans underscore the need for Congress and this Administration to stop kicking the can down the road and move soon to pass comprehensive housing finance reform. Fannie Mae and Freddie Mac cannot remain in conservatorship indefinitely. It’s time for this government to act now.”
Nearly all lawmakers on both sides of the aisle agree that the GSEs should be reformed--the issue is what should replace them. Senators Mark Warner (D-Virginia), David Vitter (R-Louisiana), Elizabeth Warren (D-Massacusetts), and Bob Corker (R-Tennessee) introduced the bipartisan Jumpstart GSE Reform Act back in November. Corker and Warner introduced legislation proposing GSE reform as far back as 2013 but have yet to make any headway.
Click here to see the entire white paper.