Industry Testifies on Future of GSEs

Leaders from a number of housing industry groups flocked to Capitol Hill on Wednesday to weigh in on how mortgage financing giants Fannie Mae and Freddie Mac should be structured.
The two GSEs own or guarantee 56 percent, or $5.4 trillion, of the nation's single-family mortgages, but both were placed under full federal jurisdiction last September as mounting losses from the housing crisis threatened their operations. And today in Washington, as lawmakers contemplated their exit from governmental conservatorship, they asked, ""What do we do with them nextx""
According to James B. Lockhart III, director of the GSEs' regulator, the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac are still ""critical supervisory concerns."" Lockhart testified before a House Financial Services subcommittee that he sees three possible roles for Fannie Mae and Freddie Mac going forward.
Lockhart said the companies could be structured as liquidity providers of last resort for the secondary mortgage market; they could serve as risk insurers of mortgage-backed securities (MBS); or they could grant subsidies to lower the cost of credit for certain borrowers. Whatever model lawmakers choose, Lockhart said, there must be a clearly defined line between the federal and private sector roles within the secondary market. Lockhart also said he was opposed to nationalizing the firms ""because government insurance programs are particularly high-risk and rife with moral hazard.""
Joe Robson, chairman of the National Association of Home Builders (NAHB), said Fannie Mae and Freddie Mac should not be rebuilt as fully private companies, nor should they be converted into purely government entities. Instead, Robson suggested a cooperative-like structure, in which mortgage and real-estate companies own shares in Fannie and Freddie and the two firms retain federal backing for guaranteeing MBS.
According to Michael C. Berman, vice chairman of the Mortgage Bankers Association (MBA), the secondary mortgage market requires ""limited"" and ""transparent"" support from the government. Berman testified, ""MBA recommends channeling this support through an explicit government guarantee against credit risks associated with certain mortgage investments. The cost to the government for providing this credit guarantee could be offset by risk-based premiums paid by investors.""
Lockhart concedes that the GSEs' old model of private, for-profit ownership underwritten by an implicit government guarantee is to blame for their downfall. It has been argued that this hybrid structure led to over-leveraging and excessive risk-taking because investors believed the government would ultimately bail out the two companies.
Since pulling Fannie and Freddie from the ranks of the private sector, the government has committed $87 billion of the $200 billion allocated to the two government-controlled firms, and policymakers warn that it could take years before they rise out of conservatorship.
Rep. Spencer Bachus (R-Alabama), the ranking Republican on the House Financial Services Committee, said, ""Whatever the GSEs' ultimate fate, we can all agree that the GSEs cannot continue as before. Socializing risk and privatizing profit must end.""