2011: The Year We Don’t Achieve GSE Reform?

BLOG VIEW: Next week begins 2011, also known as the year when the Obama administration is supposed to offer a solution for the long-ailing government-sponsored enterprises (GSEs). As you may recall, 2010 was supposed to be that fabled year, but the administration decided to punt the responsibility down the 12-month path.

It is easy to understand why the administration was eager to delay its focus on GSE reform. There were the twin miasmas of healthcare reform and financial regulatory reform that dominated much of the year's political obsession, plus other messy matters, including that still-raging war in Afghanistan. When the administration decided to postpone GSE reform action in early 2010, it was clearly hopeful that the economy and the world situation would be somewhat more stable today.

Well, to paraphrase Dinah Washington, what a dif'rence a year makes. We are entering 2011 with an economy that is still baby-weak, a secondary market that is almost entirely government-dominated, and a Washington political environment that is split with unprecedented partisan rancor. If the administration has any hints on how it wishes to proceed with GSE reform, it has yet to tip its hand.

In many ways, the onus is not on the administration to lead – after two years, it hasn't quite done that yet. The pressure will be on the new Republican majority in the House of Representatives to make good on its campaign promises of slicing down the bloated federal government. However, the Republicans have one slender stretch of common ground with the White House in regard to GSE reform: They have no ideas on how to proceed, either.

Yes, an argument can be made that Fannie Mae and Freddie Mac are still functioning, which enables the secondary market to chug along. But this is being done at the expense of U.S. taxpayers, without any evidence that Fannie Mae and Freddie Mac will be able to dig themselves out of their deep red-ink holes. Since the GSEs are technically not a part of the federal budget, this situation can continue without raising the ire of those who are in pain over Washington's bloated deficit.

In the December edition of Secondary Marketing Executive, the concept of another year without GSE reform was addressed by Alex Epstein, a fellow at the Ayn Rand Center for Individual Rights. ‘These are among the fundamental villains of the housing crisis,’ Epstein said. ‘And the idea that they will be maintained indefinitely is very scary.’

I have to concur with Epstein on this front. The longer Fannie Mae and Freddie Mac remain in conservatorship, the more natural their state of affairs becomes. And if Washington gets held hostage to political posturing between the two parties or distracted by other crises (most likely from the still-smoldering debate on healthcare reform, which has already spilled into the courts), then GSE reform will get firmly deposited on that proverbial back burner.

And even if a minor miracle occurs and GSE reform takes shape in 2011, it will be years before the transition out of conservatorship is completed. This, of course, means that there will be an additional two, three, four – or maybe more – years while the status quo remains in place. That's great for the grasp that Fannie Mae and Freddie Mac has on the secondary market, but it is not good for the long-term recovery of the industry and the wider economy.

Still, miracles have been known to happen. We'll keep focused on this as 2011 progresses. Happy New Year!

– Phil Hall, editor, Secondary Marketing Executive

(Please address all comments regarding this opinion column to hallp@sme-online.com.)


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