NAR Introduces Plan to Re-Charter GSEs as ‘Publicly Regulated Private Utilities’


Adding to the recent buzz around housing finance reform, the National Association of Realtors (NAR) has introduced its own proposal for transitioning government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac out of conservatorship.

The “working draft,” which was unveiled during NAR’s Housing Finance Reform Policy Forum on Feb. 7, calls for re-chartering the companies into Systemically Important Mortgage Market Utilities (SIMMUs), similar to Systemically Important Financial Market Utilities (SIFMUs).

These “publicly regulated private utilities” would be private and could have shareholders but would be regulated by the Federal Housing Finance Agency or an equivalent agency. The proposal would essentially return the companies to a structure similar their original charters – only with greater regulatory oversight. The utilities would cover risk via guarantee fees (i.e., private capital in a first-loss position) but the government would step in and cover losses under catastrophic conditions.

“After being established in the Dodd-Frank legislation, the Financial Stability Oversight Council (FSOC) in the U.S. Department of Treasury designated eight private market entities as SIFMUs because, ‘a failure or a disruption to the functioning of an FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system,’” write the papers’ co-authors, Dr. Susan Wachter, professor of real estate and finance at the University of Pennsylvania, and Dr. Richard Cooperstein, head of risk management at Andrew Davison and Co.

“This precisely describes the GSEs. SIFMUs are part of the financial structure and provide services between financial entities in the same way that the GSEs provide the standard setting, counterparty monitoring, and stability that allow for smooth dispersion of credit and interest rate risk into the secondary market.”

These SIMMUs’ main mission, the authors write, would be to provide mortgage market liquidity and increase access to affordable home financing. Central to this, of course, is preserving the 30-year fixed rate mortgage.

The authors contend that the SIMMU structure makes sense when one considers the infrastructure aspects of the mortgage secondary market.

“Publicly regulated private utilities are a common solution in markets with scale economies and shared infrastructure, a standardized product, and broad community value,” the authors write in the draft proposal. “This is true for financial markets in particular. Standardizing and intermediating risk to global markets provides efficiency and price discovery and brings in private capital.

“As with any public utility, the federal government’s responsibility is to implement effective governance that ensures a focused mission and regulated returns in exchange for the valuable government franchise,” the authors write. “The objectives are that the regulated entities support orderly markets with rational and fair pricing, including for inclusive lending objectives, and that the entities limit and price externalities.”

The GSEs current work in creating a common security and shared platform would be able to continue as planned.

NAR emphasizes that this is not a “recap and release” plan, rather, the proposal “is intended to provide a pragmatic solution to the challenges facing the housing finance system by prioritizing and protecting a liquid mortgage market for Middle America and underserved borrowers alike.”

“This vision is the result of years of research and collaboration between NAR, our members, our friends in the industry and countless policymakers who have been influential in this arena,” says John Smaby, president of NAR, in a statement. “Our hope is that this research will help provide Congressional leaders and administration officials with a credible, deliberate framework as they work to secure reforms that will benefit taxpayers, consumers and the American economy.”

“Ultimately, ensuring the GSEs continue providing liquidity and stability in the mortgage market remains NAR’s priority during these discussions,” Smaby adds.

“This vision of a reformed secondary market for housing finance first recognizes the need for the GSEs to carry out a public mission, the same need that led to their initial creation,” the paper states. “Second, this proposal builds upon the transformed enterprises under conservatorship, bringing in appropriate levels of private capital and a strong regulator to protect taxpayers.

“Third, this proposal codifies a structure that is effective, resilient and fair, balancing the tension of private operating companies with the public mission,” it adds. “It builds on what works today and creates a system that will serve the nation for decades to come.”

The SIMMUs would only guarantee mortgages that comply with the Qualified Mortgage (QM) and Ability to Repay rule (ATR) rules, as well as other standards as deemed fit by the regulator. 

“Mortgages guaranteed by the entities that include less than 20 percent borrower equity would continue to require credit enhancement to substitute for the homeowner’s stake,” the paper states. “Likewise, the entities would continue to enforce capital and operational standards for servicers and credit counterparties that protect taxpayers while achieving the public mission. 

“The entities would be responsible for providing clear rules regarding warranties made by counterparties and for related repurchases. Incentives should motivate shareholders to enforce prudent standards to maintain their regulated returns.”

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