Investors Unite: MBA’s GSE Reform Proposal Is Too Complex


Investors Unite, a coalition of investors in government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac that is pushing for the GSEs to be re-capitalized and re-privatized so that investors can recoup on their losses, recently released a statement in response to the Mortgage Bankers Association’s (MBA) GSE reform proposal, saying it is a “complex set of recommendations” that is unlikely to come to fruition anytime soon because it relies completely on congressional approval “when there’s no congressional action in sight.”

What’s more, the plan “completely ignores existing shareholder litigation and the rights of shareholders in general,” the group says in its statement recently posted on its website.

The MBA’s proposal, which was first introduced in January, is detailed in a new white paper, “GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market.” The plan, which, so far, has garnered broad support from the industry, calls for the GSEs to be “congressionally re-chartered” – in other words, re-privatized – but operating with an “explicit guarantee” on the mortgage-backed securities they issue. The plan is the work of the MBA’s 17-member GSE Single Family Task Force, which started working on it back in 2012 (and some of the ideas for reform stretch back as far as 2009).

In its statement, Investors Unite criticizes the MBA’s plan, saying it “introduces unnecessary complexity,” particularly with regard to the steps that would need to be taken in order for Fannie and Freddie to be recapitalized and returned to the private sector.

“The MBA’s proposal for a ‘transition’ period includes a complex set of recommendations that seemed aimed at accomplishing two objectives: 1) creating a mechanism to manage legacy assets of Fannie and Freddie as they transition to new guarantors; 2) creating a process for the entrance of additional guarantors as competitors to Fannie and Freddie,” the group writes in the article. These parts of the proposal, the group says, would be very complex to develop.

Instead, the group insists that the Federal Housing Finance Agency (FHFA), conservator of the GSEs, already has the power to implement the recapitalization piece administratively.

“[The] MBA ignores a far more straightforward solution for recapitalizing Fannie and Freddie that FHFA as conservator already has the powers under HERA to implement,” the group writes in its statement. “In fact, the ‘AIG approach’ cited by [the] MBA in its [white] paper could be implemented right now by FHFA Director Mel Watt. He can simply exercise FHFA’s existing statutory powers to end the net worth sweep, declare the government’s preferred stock paid off (Fannie and Freddie have paid more than $70 billion in excess of the $187 billion they were advanced in 2008), and selling the Treasury’s common stock into the marketplace.

“None of this would require congressional action, and, most importantly, stopping the sweep and allowing the companies to rebuild their capital base would bring the conservatorship into compliance with [HERA],” the group states.

The MBA, however, says that to “recap and release” the GSEs without putting a backstop in place would be a grave error.

“Advocating for ‘recap and release,’ especially without significant reform first, is crazy,” David Stevens, president and CEO of the MBA, said during his opening remarks on Monday during the MBA’s National Secondary Market Conference and Expo in New York City. “And you know the definition of insanity: doing the same thing over and over again hoping for a different result. We have come too far. Let’s move forward, not backward, and recognize that this is moving forward one way or the other.”

Although Investors Unite says there is “no congressional action in sight” when it comes to GSE reform, the MBA claims it has been working closely with the Trump administration and members of Congress and that a definitive proposal will soon be on Congress’ plate.

“Both Congress and the administration are pursuing GSE reform legislatively – that is a fact,” Stevens said during the conference. “The teams are on the field, and the game is in play; the choice is to either stand on the sidelines and protest or get in the game. [The] MBA plans to get in the game to help craft a solution that works for all lenders, consumers and the housing finance system. There is no other option but to engage and lead on this subject.”

Although Investors Unite is critical of the MBA’s plan, it, nonetheless, recognizes that the MBA made some major concessions along the way.

“In a notable reversal from prior positions the organization has taken, the MBA now recognizes that completely doing away with Fannie Mae and Freddie Mac is impractical and that capital retention at both companies is necessary to protect taxpayers,” the group writes. “We’re encouraged to see that MBA has changed its position on both of these issues, and we also note that in [its white] paper, MBA acknowledges the role of the [FHFA], as anticipated under HERA, in stabilizing the companies during the conservatorship.”

The group also applauded the MBA for recognizing that the FHFA has worked extensively with the GSEs since the crisis to implement a plethora of new rules and requirements that make the GSEs “already close” to the “recommended utility-model end state” that the MBA’s plan ultimately seeks to achieve.

“Positively, the MBA proposal also affirms certain principles that have guided public policy in housing for generations: The right mix of public and private activity helps qualified buyers access the dream of homeownership through products such as the 30-year fixed mortgage, and enabling people at all income levels to attain decent housing is a societal goal that should under-gird public policy,” the group writes in its statement. “This was the historic mission of Fannie Mae and Freddie Mac, and the FHFA, as the conservator of these companies, has played a crucial role as regulator in refocusing the companies on this mission over the past eight years.”

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