What is to happen with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have been in government conservatorship since 2008 and have been seeing 100% of their profits swept to the U.S. Treasury since 2012?
Most everyone agrees – especially those in the mortgage and housing industries – that the current situation can’t go on forever. Eventually, the government is going to have to come up with a plan to transition the companies back to the private sector, perhaps with a different set of functions, or come up with some other entity to replace them.
Since the GSEs turned profitable a couple of years ago, there have been numerous proposals on how best to transition them out of conservatorship. Unfortunately, this has proven far more complicated than most people imagined; any restructuring of the housing finance market must be handled delicately so as not to disrupt the still-recovering and still-fragile mortgage and housing markets.
But with the Trump administration in the White House and a Republican-controlled Congress, it could be argued that the time has never been so ripe for GSE reform to finally happen. The question is, will this administration – which, at this point, is hungry to get some legislation successfully passed – be bold enough to take up GSE reform in 2017 or 2018? And if so, which proposal, or proposals, will ultimately gain favor in Congress and determine the GSEs’ future?
Recently, the Mortgage Bankers Association (MBA) released a new white paper, “GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market,” that offers a more detailed description of its previously announced GSE reform proposal. First introduced in January, the MBA’s plan calls for the GSEs to be “congressionally re-chartered” – in other words, re-privatized – and, importantly, calls for an “explicit guarantee” on the mortgage-backed securities they issue.
So is the MBA’s plan for GSE reform “The One”? Maybe, maybe not, but so far, it does seem to have broad support from the industry. In a recent interview with MortgageOrb, Les Parker, CMB and senior vice president of strategic business development for LoanLogics, said in his opinion, “The MBA is on target with its approach.”
“[The plan] should provide a higher level of risk-bearing private capital into the market, which will significantly lower the industry’s dependence on government support while enhancing market stability,” Parker told Orb. “It will ensure we have multiple guarantors that will be regulated much like private utilities while balancing the needs of consumers, lenders and shareholders, including protection for both the taxpayer and the borrower.”
Parker added that he thinks the proposal’s chances for success are “quite good, considering how much time and effort has been invested by a wide cross-section of industry participants.”
“We’re very hopeful,” he added.
However, Parker said GSE reform is likely going to take some time to implement, as it will likely need to be rolled out in phases.
“I certainly think there’s potential for reform under the Trump administration, but with most other major issues, GSE reform is a very complex issue,” he said. “I would not expect any changes to happen overnight.”
When asked if there was anything he would change with the MBA’s proposal, Parker said, “Our primary concern is to minimize any potential disruption in the market. To the extent that the MBA’s proposal could be adjusted to ensure a smoother transition, we would be in full support. As it stands, we think the proposal addresses the interests of lenders and maintains what is working today by leveraging our existing regulatory framework and improving upon it.”
Parker added that it’s important to keep in view the fact that GSE reform and regulatory reform are intrinsically related.
“In an ideal world, they should be addressed together,” he said. “For example, from a process standpoint, some GSE requirements are very similar to what the CFPB requires of lenders.
“That being said, politically speaking, tackling both issues at the same time might not be the most expedient or practical approach,” he added.
David G. Kittle, CMB and president and vice chairman of The Mortgage Collaborative, also gave the MBA’s proposal an enthusiastic thumbs-up.
“I believe its chances [of getting approved] are good, if not for all of it, at least part of it,” Kittle told Orb. “It moves the discussion to the proper level.
“The issue of GSE reform is critically important for the independent mortgage banks, community banks and credit unions that today originate more than three out of every four home loans in the country,” Kittle said in an earlier statement. “The MBA’s reform proposal recognizes the value of a competitive and diverse primary market and calls for important reforms that will provide stable liquidity for the 30-year fixed mortgage and preserve a level playing field for smaller lenders.
“Guarantee fees based on loan quality, not volume, and a new structure that encourages increased private capital flow into the primary market are all central elements to the MBA plan and key principles for the members of the Mortgage Collaborative,” he added.
As per the new white paper, the MBA’s GSE reform proposal will accomplish the following:
- Inject much higher levels of risk-bearing private capital into the mortgage system while dramatically reducing the system’s reliance on government support;
- Enhance the stability of the mortgage system with multiple guarantors that will operate as privately owned utilities;
- Protect taxpayers and consumers with a clear set of market conduct rules, prudential requirements and a new federally backed mortgage insurance fund (standing behind the mortgage-backed securities, not the guarantors themselves), financed with appropriately priced insurance premiums;
- Ensure that mortgage lenders of all sizes and business models have equal access to the secondary market;
- Improve service and performance in the secondary market, with multiple guarantors competing on operations and systems development, customer service, product parameters and innovation, and pricing and execution;
- Minimize disruption during the transition to the new system by preserving what works in the current system and utilizing the existing regulatory framework where appropriate; and
- Meet the needs of the full continuum of households, from families requiring the most directly subsidized, affordable rental homes to those served by the completely private jumbo single-family lending market.
The new white paper – along with an earlier one released in January, “GSE Reform: Principles and Guardrails” – is the work of the MBA’s Task Force for a Future Secondary Mortgage Market, which is made up of a broad cross-section of mortgage and housing industry professionals who work in a broad cross-section of companies operating in all segments of the industry.
“GSE reform must be done with the objective of maintaining a level playing field for all lenders,” the MBA says in a statement. “The secondary mortgage market is strongest when it is well positioned to serve the most diverse group of lenders possible, thus promoting broad competition, which is ultimately beneficial for consumers. [The] MBA’s proposal meets these complementary goals.”
To download the new white paper, click here.