REQUIRED READING: After existing in some form or another for over 70 years, it would seem that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac could be nearing a final wind down at the hands of Congress and/or federal regulators. Faced with housing and real estate market turmoil of historic proportions, federal leadership has been pressed to do something.
Certainly, without delving deeply into the cause of the recent subprime meltdown, the GSEs make an easy scapegoat: accounting scandals, a sometimes unclear mission, the inability to stem the tidal wave of the subprime meltdown and, now, government conservatorship.Â
It would be pretty difficult to defend all of the decisions made by some GSE leaders, and it would be even more difficult to make the absurd declaration that ‘nothing is wrong’ in the mortgage market today. Freddie and Fannie bear some (but not all) of that responsibility. Almost everyone in the industry can claim the same thing.
That being said, will no one stand up for the decades of good done by these institutions? Are we now ready to throw out the baby with the bathwater in a convulsive, knee-jerk response to the maladies of the past five years? Do we really believe that the concept behind the GSE is so fundamentally flawed at its core that it is time to throw on the brakes while the federal government all but jumps out of the proverbial car speeding down the highway?
I, for one, do not.
While most opposition to the concept of privatizing the securitization of mortgages tends to rely on the possible ill effects of such a transition, I am willing to defend the concept of Freddie and Fannie. I concede immediately that some things need to change. I cannot defend everything that has happened within the past 10 years. Â
Then again, show me any large institution remotely involved in the mortgage and housing industry that did not have its share of poor decision-making. I do assert that Freddie and Fannie did not single-handedly pull down the mortgage industry. And I believe we are ignoring their record of success as we pull the plug on them.
Innovations 'r' us
While the principal mission of the GSEs was to make homeownership more accessible and affordable by making credit easier to come by (as well as to add liquidity and stability to the housing market), their practical role as the largest purchasers of home loans put them in a position to, more or less, dictate the terms of those purchases. In other words, Freddie and Fannie were the only entities able to impose some semblance of national standards on the mortgage banking industry.
Although we can debate the merits and quality of the various decisions the GSEs have made throughout the years, we cannot argue that Freddie and Fannie are the only institutions (with the except of the federal regulators) capable of imposing requirements for new technology, new systems, forms and data standards on an industry not known for being fleet of foot. This is an industry that continues to struggle in its quest for the ‘paperless mortgage.’ Regulating that innovation dramatically increases government intrusion into an already over-regulated market.Â
However, privatizing the market almost ensures that innovation will slow to a crawl, unless the largest entities mandate it. One can argue that the GSEs did or did not steer positive innovations in the past. One cannot, however, argue that the concept of the GSE allows for positive innovation.
Obviously, the GSEs were a unique hybrid of profit-making and public charter. Many have grumbled about the massive profits that were reaped during the refinance and subprime boom years. But those people forget that the market was driven not just by the GSEs, but by the largest lenders and, more importantly, an impatient federal policy of affordable homeownership that accelerated during the late 1990s.Â
At least we can say that the GSEs made their decisions with an eye toward a charter requiring them to look after the homeowner. Nothing in a for-profit, private institution's directives require it to do anything other than build upon profits.
So when we turn the job of securitization over to the private market, who will look after the homeowner? Again, perhaps the GSEs came up short, at times, in this regard. For that, the individuals responsible have and should be held accountable. But do the shortcomings of a few individuals mandate the elimination of two institutions with a 70-year track record of mostly positive results?
Affordable housing issues
It seems that many of the reforms and regulations cascading out of Washington, D.C., these days are aimed at striking down the assumed causes of the subprime meltdown. Many times, these reforms do not delve deeply enough into how the industry really works or, more importantly, what really caused us to come tumbling down the mountain. Â
The current agenda in our nation's capital is to fix (or, for the more cynical, to appear to be fixing) the cause of our economic recession. The easy root of that recession is, of course, the housing/mortgage collapse.Â
The simplistic explanation of that housing/mortgage turmoil is the failure of so many subprime mortgages – which leads us to the faulty conclusion that most subprime mortgages were forced into the pipeline, whether qualified or not, by our GSEs.
Whether one accepts or denies such a premise, it seems to be the cause-and-effect impetus to the logic behind the regulatory cyclone bearing down on the mortgage industry. It will probably prevail for another few years.
Let's look ahead five or even 10 years from now, to a time of 20% down payments, historically high credit rates, and a daunting amount of housing inventory that continues to clog the landscape. Let's look ahead to the era of the Qualified Residential Mortgage and the vanilla home loan. Who will bear the biggest impact?
The federal government will all but declare dead the American Dream when it privatizes the market and winds down the GSEs. Will Congress and future president stand and defend the brave new world of plain-vanilla loans in the name of stability when the angry masses begin to shout about the difficulties of home buying? Or will they start again, with another ad-hoc solution designed to make housing affordable – perhaps something along the lines of federal involvement in the housing market?
Yes, the GSEs require some reform – even the executives of Freddie and Fannie will agree with that. And, yes, more private involvement in the market is a good thing. But removing Freddie and Fannie from the equation, in an abrupt and poorly reasoned manner, is not the answer.Â
If the goal is to provide a quick fix, this is certainly not the route to take. And if the goal is to provide long-term stability to the market, it will, at best, be stability at the expense of our nation's economy and gross domestic product. Instead, it's time to take a longer, harder look at the issue, and ask ourselves if the GSEs are really at the core of our issues.
James W. (Bill) Moody is executive vice president at New Millennium Title Group, based in Simi Valley, Calif. He can be reached at (877) 262-5504.
