One thing that David Stevens, president and CEO of the Mortgage Bankers Association (MBA), made perfectly clear during his opening remarks on Monday during the MBA’s National Secondary Market Conference and Expo in New York City was that recapitalizing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and releasing them back to the private sector “as is” would be an irresponsible means of achieving GSE reform.
“Advocating for ‘recap and release,’ especially without significant reform first, is crazy,” Stevens told the crowd of mortgage bankers and secondary market participants. “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.”
Indeed, the topic of GSE reform was front and center throughout much of this year’s conference. That’s partly because the MBA recently released its own proposal for GSE reform in the form of a white paper, “GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market,” which 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 white paper offers a more detailed description of the MBA’s previously announced GSE reform proposal, which was first introduced in January.
Whether any of the MBA’s recommendations actually make it into GSE reform legislation – and further, whether any legislation is actually drafted – remains to be seen. As Stevens pointed out, the Trump administration and certain Senate and House leaders have indicated that GSE reform is a “top priority” for this year. For example, Secretary Steven Mnuchin said during a recent interview that he is “committed that under this administration, we’re going to have housing reform so that we don’t just leave these entities the way they are. They’ve been sitting there for too long of a period of time, and we need a solution.” In addition, Mark Calabria, Vice President Mike Pence’s chief economist, said in March that “a set of principles” for GSE reform would likely emerge in the coming months. Still, many others point out that GSE reform will likely take years to implement, even if a definitive proposal is approved this year.
There are some – including investors who held onto their stock following conservatorship – who feel that the best thing to do is to return Fannie Mae and Freddie Mac back the private sector under the current rules under which they operate, and if they fail, they fail.
Stevens implied that to do so would be a huge mistake.
“Simply put, ‘recap and release’ is more like rewind and repeat,” he said. “It would return the GSEs to their previous state without safeguards to ensure the positive progress during conservatorship remains and without any guarantee the agencies will operate in a manner that protects the taxpayer going forward. This is dangerous ground that destabilizes the system and does nothing to protect our economy, our homes or taxpayers from another bailout. Rather, recap and release is a ‘solution’ designed to protect the personal pocketbooks of a select few.
“This misguided dialog threatens to recreate the very crisis it purports to avoid and destabilize the level playing field for all eligible lenders to compete in this market equally,” Stevens added. “The financial crisis plainly exposed the structural conflicts, misaligned incentives and other weaknesses associated with the GSE business model and regulatory framework. The result was a catastrophic failure of the secondary mortgage market that required more than $187 billion in direct taxpayer support and a continuing federal commitment of more than $240 billion.”
Stevens, however, acknowledged that the GSEs, under their regulator, the Federal Housing Finance Agency (FHFA), have made great strides to fix the operational problems that led to these failures.
“[The] FHFA has made significant progress mitigating some of the key flaws in the GSEs’ operations that distorted the market in the run-up to the crisis, including bringing parity and transparency to their pricing models, moving toward a single security and developing the common securitization platform,” Stevens said.
Still, “simply recapitalizing the firms and releasing them – without structural reforms – would threaten to bring back the same flawed incentive structures that contributed to the GSEs’ failure,” he said.
Regardless, Stevens said he is optimistic that GSE reform is finally going to happen this year.
“While we have come a long way and made many substantial changes to protect the housing system, GSE reform is the last piece of unfinished business before we can move forward with true housing recovery,” Stevens said. “On the Hill, within the administration, and among major stakeholders, activities around housing run high, showing a lot of promise for housing finance reform.
“Both Congress and the administration are pursuing GSE reform legislatively – that is a fact,” he later added. “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.”
To read Stevens’ prepared speech, click here.