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Ex-FHFA Chief Makes Case for Radical Housing Reform

Fannie Mae Freddie Mac BHThe former head of the Federal Housing Finance Agency called for a radical rethink of the U.S. housing system that could spell the conversion of the GSEs to lender-owned institutions.

Edward DeMarco, who ran the FHFA for more than four years, co-authored “Why Housing reform Still Matters” for the Milken Institute with Michael Bright, who pitched a failed reform plan in 2014 as a member of Senator Bob Corker’s (R-Tennessee) staff. In it, the authors assert that the changes in the housing market since 2009 have become increasingly complex and burdensome, with Fannie Mae and Freddie Mac at the center, “trapped in a state of legal limbo called conservatorship.”

“The government life support given to [the GSEs] at the height of the financial crisis was meant to be temporary, followed by legislation replacing the toxic aspects of their activities and reforming our market structure,” the report states. But a long-term replacement for that “temporary” system has yet to be installed, mostly because of political rancor, and a return to the way it used to be would just set up Congress to have to bail out the GSEs should another financial disaster hit.

“We must also reduce the likelihood that financial institutions will need emergency congressional action in the future,” the authors wrote. Moreover, until Congress acts, “the FHFA is stuck in its role of regulator and conservator,” they wrote.

“Market signals, innovation, and competition are stifled, precluding the full return of private capital to manage mortgage risk and heaping that risk on the backs of taxpayers.”

Ed DeMarco and Michael Bright

Some aspects of the housing system should be saved, according to the authors. Maintaining a liquid mortgage-back securities (MBS) market, with its innovative to-be-announced (TBA) market, which allows lenders to lock in a future mortgage price, is one thing the authors want to keep. Maintaining access to secondary mortgage markets and allowing primary markets to compete with them are others.

What needs to change, according to the plan, is that GSEs need to be set up so they won’t need to be bailed out again, mainly by taking them out of that limbo of conservatorship and letting lender-owned institutions manage Fannie and Freddie, rather than the federal government.

“Today’s market relies largely on taxpayer capital, not private capital,” the authors wrote. “But for now, with taxpayers guaranteeing roughly three of every four mortgages, the federal government is occupying the field. Market signals, innovation, and competition are stifled, precluding the full return of private capital to manage mortgage risk and heaping that risk on the backs of taxpayers.”

About Author: Scott Morgan

Scott Morgan is a multi-award-winning journalist and editor based out of Texas. During his 11 years as a newspaper journalist, he wrote more than 4,000 published pieces. He's been recognized for his work since 2001, and his creative writing continues to win acclaim from readers and fellow writers alike. He is also a creative writing teacher and the author of several books, from short fiction to written works about writing.

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