Subsequent to the housing crisis that resulted in the Great Recession, the Housing and Economic Recovery Act (“HERA”) of 2008 was enacted by the United States Congress on July 30, 2008. Among other elements, the law created the Federal Housing Finance Agency (“FHFA”) and conferred FHFA the authority to place Fannie Mae and Freddie Mac, the Government Sponsored Enterprises (“GSEs”), into conservatorship, which it did in September 2008.
Nearly nine years have passed since FHFA placed the GSEs into conservatorship. With a new Congress and administration, the time to act on permanent change is now. We must find a sustainable solution to the government’s role in housing finance that does not repeat the mistakes that led us to the housing crisis and the Great Recession.
In my current capacity as Chairman of the Mortgage Bankers Association (“MBA”), and having chaired MBA’s GSE Reform Task Force over the past sixteen months, I have concluded housing finance reform must incorporate three major priorities. Such priorities apply to single-family and multifamily housing finance programs.
First, taxpayer protection. We must reform the secondary market system in a way that minimizes the need for taxpayer support, except in a worst case scenario. Second, attract private capital. This must be done in a way that avoids the errors made prior to the Great Recession. And third, consumer access to credit. Consumers must have access to affordable housing, which should be viewed as a continuum from highly subsidized housing at one end of the spectrum to homes that are totally supported by private capital at the other end of the range. We must preserve and protect aspects of the current system that work well, such as the GSEs’ multifamily rental housing finance programs.
The GSEs should be transformed into privately owned guarantors with a regulated rate of return. The stability of the mortgage system would be enhanced with multiple guarantors operating as privately owned utilities. The reformed secondary mortgage market system should allow for more than two guarantors that compete on efficient operations and systems, customer service, product innovation, and effective execution. We must ensure that mortgage lenders of all sizes and business models have equal access to the secondary market.
GSE reform must require higher levels of risk-bearing private capital in order to reduce the system’s reliance on government support. Taxpayers and consumers must be protected with a clear set of rules and pragmatic requirements. A new mortgage insurance fund would provide a federal backstop for the mortgage-backed securities, but not the guarantors themselves, and would be financed with appropriately priced insurance premiums.
Significant care must be taken in designing the transition process from current conservatorship to the reformed guarantor model; this is critically important. GSE reform legislation must include a clear road map that first repairs the regulatory foundation and then transforms the GSEs into the first two guarantors. We must minimize disruption during the transition by preserving what works in the current system and, where appropriate, utilize the existing regulatory framework.
Housing finance reform will be a lengthy process, such is the reason for Congress to act now. Only Congress can enact legislation that would make possible the re-chartering of the GSEs. Only a legislative solution can provide political legitimacy and long term market certainty for the housing finance system.Download PDF