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Future of GSEs Uncertain, Many Lobbying for Their End

For decades the GSEs have made it possible for many people to achieve their homeownership goals by reducing the cost of credit and making it more readily available.


In light of the recent financial meltdowns across a wide breadth of sectors, banks and other corporations are calling for reform that they say the Dodd-Frank Act didn't cover.

Texas representative Jeb Hensarling has openly criticized the GSEs and has proposed a five-year timeline to dismantle and do away with the entities.

On his Web site, Hensarling writes, ""The most disturbing aspect of the Dodd-Frank permanent bailout bill was the fact that it did nothing to reform ""Fannie"":http://www.fanniemae.com/kb/index?page=home and ""Freddie"":http://www.freddiemac.com/. You can't address systemic risk while ignoring these two GSEs.""

He continues, ""Fannie and Freddie were not born of a competitive marketplace, but in a government laboratory. They were allowed to exploit their implicit government guarantee to take on enormous risks. These two entities expose the taxpayer to unlimited risk and will likely end up receiving the mother of all bailouts.""

Hensarling believes private companies should take the place of Fannie and Freddie.

Mike Heid, co-president of ""Wells Fargo Home Mortgage"":https://www.wellsfargo.com/mortgage/ appeared in September in front of the House Financial Services Committee on behalf of the ""Housing Policy Council"":http://www.fsround.org/housing/index.html (HPC).

Heid also believes private companies should provide the government approved securities that Fannie and Freddie currently provide.


In his ""testimony"":http://financialservices.house.gov/Media/file/hearings/111/Heid092910.pdf, he said that Fannie Mae and Freddie Mac had performed their secondary market functions well for years, but in hindsight it is apparent that the GSE model was flawed. He cited a lack of adequate supervision and regulation as a platform for the GSEs to use extreme influence to grow their portfolios beyond what was necessary.

Heid acknowledged that the Dodd-Frank Act addresses securitization issues that developed in recent years, prompting tighter regulations on underwriting standards and risk retention requirements and even motivating new standards from the GSEs.

But, Heid says, the HPC has developed a proposal designed to address the problems within Fannie and Freddie, rather than just within the origination-to-distribute model.

In his testimony, Heid says HPC's proposal is designed to:

• Encourage private sector capital to support the secondary mortgage market;

• Ensure a steady flow of reasonably priced conventional mortgages to borrowers;

• Limit the role of the Federal Government and the risks taken by the taxpayer in the secondary mortgage market; and

• Provide a flow of funding to support affordable owner-occupied and rental housing.

Heid's plan outlines the role that private companies would play, including purchasing conventional mortgages from originators and guaranteeing the payment of principal and interest on the securities, as well as charging the originators a fee for the guarantee. The private entities would be chartered and supervised by the federal government but the government would not back the companies.

Rather than back the companies themselves, as the government does with the GSEs now, Heid proposed the government provide a guarantee for the payment of principal and interest to investors in the securities packaged by the companies.

The private companies would pay a fee to the government for that guarantee, and the fee would be put into a reserve.

The Obama administration is set to release a report on the future of Fannie and Freddie in the coming weeks, but market participants have low expectations for a definitive solution in the report.

About Author: Joy Leopold


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