Lenders Scramble To Avoid The Phishing Hook

If Federal Reserve Chairman Ben S. Bernanke has his way, Freddie Mac and Fannie Mae would focus on loans for affordable housing – and only loans for affordable housing. However, few industry observers believe that he will be able to see that idea come to life.
   In a speech delivered via satellite to the Independent Community Bankers Association's National Convention in Honolulu on March 6, Bernanke proposed realigning the government-sponsored enterprises (GSEs) away from their current activities to a new exclusive focus on the affordable housing sector. Bernanke cited Fannie Mae and Freddie Mac's combined financial problems (debts and outstanding credit guarantees of $5.2 trillion) as being the key to his proposal.
   "The size and the potentially rapid growth of GSE portfolios, combined with the lack of market discipline faced by GSEs, raise substantial systemic risk concerns," says Bernanke.
   The answer for defusing these risks, Bernanke continues, is through a new leadership role relating to affordable housing. "What public purpose should be served by the GSE portfolios?" he says. "An obvious and worthy candidate is the promotion of affordable housing. The Congress has frequently expressed the priority it attaches to affordable housing through, for example, the provision of various housing programs and tax incentives aimed at increasing the availability of moderately priced homes and rental housing."
   By shifting operations in this manner, Bernanke adds, the GSEs and the housing market would enjoy a win-win situation.
   "Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general, not just the GSE shareholders, receives a meaningful return in exchange for accepting the risks inherent in the portfolios," he says.
   Another call for an increased affordable housing focus from the GSEs (albeit not an exclusive focus proposal) was made in an address given the day before the Bernanke speech. James B. Lockhart III, director of the Office for Federal Housing Enterprise Oversight, told attendees at the America's Community Bankers Government Affairs Conference in Washington, D.C., that Fannie Mae and Freddie Mac needed to pay more attention to this sector.
   "With the numerous privileges associated with the GSE charter come important responsibilities," says Lockhart. "Among those are the duty to play leadership roles in developing innovative solutions to difficult issues, such as those we face today with subprime mortgages and non-traditional mortgage products. Within the limitations and requirements of their respective charters, the house GSEs each have a responsibility to be thoughtful and active participants in developing sound standards and guidelines in these segments of the market."
   Capitol Hill, however, is not following Bernanke's lead. His proposal was not adopted in the language of the recently introduced H.R.1427, the Federal Housing Finance Reform Act of 2007, which called for the creation of an "Affordable Housing Fund" rather than a permanent realignment of the GSEs' activities into this sector.
   Yet industry experts question whether Bernanke's proposal could ever make the leap from speech to reality.
   "It's not going to happen any time soon," says John McCune, research director for SNL Financial in Charlottesville, Va. "As the mortgage market is structured right now, Fannie and Freddie are an integral part of how it works. Implementing that proposal would be disruptive in the near term."
   McCune notes that even if the Bernanke proposal was enacted, it would not be done immediately. "If it happens, it would be over a period of time so the market could adjust to it," he says. But he adds that is only hypothetical: "The odds of it happening are pretty slim."
   Some observers believe Bernanke's proposals are simply the wrong solution.
   "Fannie Mae and Freddie Mac have been instrumental in helping middle-class households receive lower interest rates on their mortgages," says Anthony B. Sanders, professor of finance at Ohio State University. "Fannie and Freddie have also extended their benefits to the Alt-A market. Forcing Fannie Mae and Freddie Mac into the subprime market is potentially dangerous, given the default and loss rates associated with the subprime market. Unfortunately, households that demand affordable housing tend to have lower income and credit scores than households in the conforming or jumbo mortgage markets."
   For Sanders, the question of affordable housing can be addressed through other channels. "Frankly, the federal and state governments already have programs in place to serve affordable housing initiatives," he says. "It seems redundant to force Fannie Mae and Freddie Mac into this market. My suggestion would be for the Federal Housing Administration to tighten underwriting standards and use the free market to solve the problem of whether there is too much subprime credit in the market."
   Janet Tavakoli, president of the Chicago-based financial consultancy Tavakoli Structured Finance, echoes Sanders' support of the GSEs. "I feel Fannie and Freddie are not getting enough credit for the work they've been doing," she says, adding Bernanke's speech was vague on one critical point. "I'm not clear what his proposal is – he doesn't define "affordable housing.'"
   Yet the affordable housing proposal is not without some degree of support. John C. Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute in Washington, D.C., disagrees with the notion of the GSEs' having a traditional commitment to affordable housing.
   "I think perhaps Chairman Bernanke may be reminding policy makers of the issue," says Weicher. "In the analyses that we did at the Department of Housing and Urban Development when I was there, we found that the GSEs do a worse job of serving first-time homebuyers, particularly minority first-time homebuyers, than the rest of the conventional market and other prime lenders. That was also true for low- and moderate-income homebuyers in general."
   Neither GSE issued a public comment on Bernanke's speech, and the only elected official to voice enthusiastic support of the proposal was Sen. Richard Shelby (R-Ala.), who issued a press statement urging Congress to "pay close attention to the issues he has identified regarding Fannie and Freddie."
   However, James A. Bianco, president of Bianco Research LLC in Chicago, doesn't believe the GSEs themselves will facilitate the Fed chairman's proposal.
   "Realistically, it's not going to happen," says Bianco. "They are not going to sit back and allow their mandate to be changed from their stock price."
   Bianco states that Bernanke deserves credit for raising the subject of where Fannie Mae and Freddie Mac should be heading in the future. "Fannie and Freddie are basically entities without a purpose," he says. "If they had not existed, would we have the need to create them today? Their purpose is now satisfied in the marketplace, and we no longer need them. Besides, they exited the market in the past two years because their growth went to zero."
   Bianco offers a choice of proposals for the GSEs: become completely privatized, like Sallie Mae, or revert to a government agency status like Ginnie Mae. "This halfway thing just doesn't work for them," he says.


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