Will GSE reform finally get done in 2018?

Written By: Joel Palmer, Op-Ed Writer

Things are heating up in the world of GSE reform. 

From Congress, to the Federal Housing Finance Agency, to groups representing lenders and consumers, measures are being pushed and debated in hopes of ending federal government control of Fannie Mae and Freddie Mac. 

In mid January, FHFA Director Melvin L. Watt issued a seven-page document to the leadership of the U.S. Senate Banking Committee describing the agency’s “Perspectives on Housing Reform.”

Among Watt’s ideas for a post-conservatorship housing finance system is a suggestion to “establish shareholder-owned SMEs (secondary market entities) operating as utilities with regulated, overall rates of return and appropriate capital requirements.” 

The proposal also calls for the creation of a Mortgage Insurance Fund that would “provide an explicit and paid-for catastrophic guarantee on mortgage-backed securities issued by regulated SMEs.”

A couple of weeks later, a new draft of GSE reform legislation authored by Republican Senator Bob Corker and Democrat Senator Mark Warner  became public. 

David Stevens, CEO of the Mortgage Bankers Association, offered support of the bill. He noted that the legislation would create a multiple guarantor model that would help eliminate the current too-big-to-fail model. He also said it levels the playing field by ensuring the same pricing and credit terms for all lenders regardless of business model or size.

A key difference between Watt’s proposal and the Senate legislation is the treatment of affordable housing policies. Watt’s proposal leaves the system unchanged. The Corker-Warner bill lacks the federal charter stipulations to preserve those policies.

That last point made the bill a nonstarter for consumer advocates.

“This bill reforms Fannie Mae and Freddie Mac, but abolishes their affordable housing goals. This should be a dealbreaker for any fair-minded Senator…It would be disastrous for the economic future of young Americans,” said John Taylor, President and CEO of the National Community Reinvestment Coalition.

Why the sudden surge in reform discussion after little action last year?

It would seem the biggest push is the impending expiration of Watt’s five-year term in January 2019. It’s likely President Trump’s appointee will be more conservative than Watt, who was appointed by President Obama. 

Without GSE reform legislation, FHFA remains the conservator of of Fannie and Freddie and would maintain broad operating authority. If there is no GSE legislation on the books once that leadership change occurs, the new FHFA director would have the authority to take Fannie and Freddie in a different direction.

Congressional conservatives and industry groups are using this as leverage to get their political opponents to agree to GSE reform sooner rather than later. 

In his written assessment of the Corker-Warner bill, MBA President Stevens wrote:

"I realize that there is a lot of anxiety associated with any change, but we are beyond that. In the year ahead we will be faced with a new FHFA director who may have a very different view about the role of the government in housing, and may come with different perspectives about who participates and how they participate.”

Not to be outdone, House Financial Services Committee Chairman Jeb Hensarling, a Republican, used a question-and-answer session with Treasury Secretary Steve Mnuchin to reinforce the need to get reform legislation passed. During a hearing earlier this month, Hensarling asked Mnuchin the following questions, each of which the secretary affirmed:

•    “Is it true if Congress doesn’t act the FHFA director can discontinue the GSEs HARP finance program?”

•    “Is it also true the FHFA director could suspend all GSE contributions to the Housing Trust Fund if found they ‘contribute to the financial instability of Fannie and Freddie?’”

•    “And under U.S.C.124566, that the FHFA director can essentially choose not to enforce the statutory housing goals of the GSEs if he finds ‘the achievement of the housing goal was or is not feasible?’”

Republicans also have an incentive to get legislation done sooner rather than later. If mid-term elections don’t go their way this November, they may have less ability to pass their ideal reform measures.

About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.