Report: GSE Reform Won’t Take Shape for Another Few Years

Although policymakers have been busy introducing legislation to diminish the role of the GSEs, analysts at Moody's Investors Service ""believe GSE reform will not take place for at least a few more years.""

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In ""June"":http://www.corker.senate.gov/public/index.cfm/news?ID=df5abc5a-fdd4-4ddb-91b5-55559281c644, Senators Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) led efforts to ""introduce"":http://dsnews.comarticles/senators-introduce-bill-to-replace-gses-in-5-years-2013-06-25 legislation to wind down Fannie Mae and Freddie Mac in five years.

The Senate bill proposes to replace the GSEs with a federal agency called the Federal Mortgage Insurance Corporation (FMIC) that would provide an explicit government guarantee on mortgage securities. Though, not all loans will receive the government guarantee, and companies that do must take at least a first loss position on 10 percent of the security to be eligible.

Then came the ""Protecting American Taxpayers and Homeowners Act"":http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=342165 (PATH) from the House of Representatives Financial Services Committee in July.

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The act also ""aims"":http://dsnews.comarticles/house-republicans-propose-act-to-save-housing-finance-2013-07-12 to dissolve the GSEs in five years while creating a housing finance system that is supported by the private sector. The act passed the House Financial Services Committee last ""week"":http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=343722.

Unlike the bill from Corker and Warner, PATH would not have a federal agency replace the GSEs, but instead create a non-government nonprofit called the National Mortgage Market Utility (NMMU). The utility would develop ""best practices"" for the origination, servicing, pooling and securitization of residential loans. The utility would not originate, service, or guarantee any MBS. The utility will also take over the single mortgage securitization platform that the GSEs and the FHFA are developing, Moody's explained in its most recent _ResiLandscape_ report.

Despite efforts from legislators, Moody's does not foresee GSE reform happening within the next few years, stating ""catalysts for near-term reform are not very strong, especially now that the GSEs have returned to profitability.""

Moody's analysts also noted broad political support for an alternative is lacking, while the GSEs' mission to provide stability and affordability to the mortgage market does receive support.

""Furthermore, the alternative approaches have focused on re-shaping the $10 trillion residential mortgage market, which will be difficult given its size and importance to the US economy,"" Moody's stated.