Industry Groups Oppose ‘Piecemeal’ GSE Reform

A group of five industry organizations that include the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) have written a letter to FHFA Director Mel Watt on Wednesday opposing what they call the 'piecemeal' approach to GSE reform and urging the director to put Fannie Mae's and Freddie Mac's fate in the hands of Congress.

Whereas many lawmakers, civil rights groups, and housing advocates over the last year have opined that the GSEs' status quo cannot continue without putting taxpayers at significant risk, this group that wrote the letter on Wednesday rejected that ideology. Congress, they said, should handle any type of comprehensive reform to the secondary market.

The groups also encouraged Watt not to make any further changes to the Preferred Stock Purchase Agreements (PSPAs), which originally required that the GSEs pay Treasury a 10 percent fixed rate dividend per year after Treasury bailed out Fannie Mae and Freddie Mac for $187.5 billion in September 2008. The highly controversial Third Amendment to the PSPAs, enacted in August 2012, required all of the GSE profits to be swept into Treasury and also required the GSEs' capital buffer to be reduced to zero by January 1, 2018, causing no small amount of consternation in the industry. The Third Amendment has also prompted nearly two-dozen lawsuits from GSE investors who claim the profit sweep is illegal.

"We believe that the current state of conservatorship has provided stability, but policymakers and stakeholders need to continue to work together on the important efforts to advance housing finance reform through a legislative solution," they wrote. "Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners."

Instead, the groups urged policymakers to correcting structural flaws that led to the housing crash, which they said was the only way to protect taxpayers, preserve access to credit, and ensure a stable housing finance system.

"Our collective push for comprehensive reform is to ensure that any changes maintain the ongoing sustainability of the housing finance system and directly benefits consumers, rather than the balance sheets of private companies," the groups wrote. "A piecemeal approach to reform through further amendments to the Preferred Stock Purchase Agreements (PSPAs) will not resolve these issues."

The groups said the PSPAs "provide an adequate backstop to allow Congress to complete the last piece of unfinished business from the financial crisis. Detours from this long-term goal would be counterproductive."

In the letter, the groups pointed out the progress the FHFA has made toward correcting flaws in the GSEs' operations that "distorted the market pre-crisis," including the work toward a single security and developing a common securitization platform.

"However, without collaboration on comprehensive GSE reform, the important work FHFA has accomplished is at risk," the groups wrote. "Furthermore, important reforms remain incomplete."

The five groups to sign the letter were (alphabetically) American Bankers Association, Mortgage Bankers Association, National Association of Home Builders, National Association of Realtors, and National Housing Conference.

Click here to view a copy of the letter.