Not So Fast on GSE Reform

In the political heat of the 2010 Congressional debate over the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), Republicans in both the House and Senate offered up amendments that would have eliminated the federal government’s $150 billion support of the beleaguered housing giants, Fannie Mae and Freddie Mac, and would have led the two Government-Sponsored Enterprises (GSEs) on a speedy path to full privatization.

In 2011, with a new House majority and the Financial Services Committee (HFSC) gavel in hand, the GOP and its previously-offered proposals for reigning in Fannie and Freddie—which collectively guarantee or own an estimated 50 percent of all new U.S. home mortgages—do not appear as simple or clear-cut in practice.

At the heart of the questions raised at this morning’s HFSC hearing over the Obama administration’s newly-released proposals for GSE reform were what the federal government’s long-standing role in the housing finance system should be and how a diminished federal role will affect U.S. homeownership, consumer access to credit, support for low-income communities, and a still-fragile U.S. housing market.

Providing testimony was Treasury Secretary Timothy Geithner, who relayed the Obama administration’s hope that Congress can approve legislation within the next two years to dismantle Fannie and Freddie over an extended timeframe and slowly shift the mortgage credit industry closer to the private market. Geithner cautioned against Congress moving too slowly or too quickly, stating that either move could further destabilize the U.S. housing market and potentially disrupt the broader economic recovery.

Overall, the Obama administration’s near-term proposals for winding down Fannie and Freddie received general praise from Republican committee members who described the proposals as positive first steps.

Rep. Scott Garrett (R-NJ), who will play a leading role in the House’s GSE reform efforts as Chairman of the Capital Markets and Government Sponsored Enterprises Subcommittee, enumerated a handful of near-term initiatives that he and the Obama administration can agree on. Among those include:

  • A gradual increase of the guarantee fees that GSEs charge investors in exchange for a guarantee of the timely payment of interest and principal on Mortgage Backed Securities (MBS).
  • A reduction in the GSE’s investment portfolio. By 2008, Fannie and Freddie held more than $300 billion in private-label MBS – MBS collateralized by subprime mortgages – ultimately exposing the GSEs to significant losses as the housing market plummeted during the financial crisis.
  • A gradual increase in down-payments for GSE home mortgages. The Obama Administration’s proposal calls for Fannie and Freddie- insured mortgages to eventually have at least a ten percent down payment.
  • A reduction in the GSE conforming loan limits. The Administration’s proposal calls on Congress to allow the temporary conforming loan limit ($729k) increase as approved in 2008 to expire as scheduled on October 1, 2011 and revert back to previous levels ($625k).

The longer-term housing finance options, however, appear to be more tricky. Members of the GOP expressed particular concern over one of the Obama Administration’s three long-term GSE reform options, which would maintain a privatized system of housing finance that would be coupled with government backstop to ensure credit access during a future housing crisis. HFSC Chairman Spencer Bachus (R-AL) argued that such a backstop would perpetuate a moral hazard created by allowing the GSEs to gain access to less costly credit through an implicit federal government guarantee of GSE-issued debt. In response, Geithner said that a privatized housing finance system with no federal backstops would merely shift moral hazard to the private lending industry.

When compared to the contentious GSE debates of last year, Tuesday’s hearing provided an air of political civility that may eventually give rise to a bipartisan solution for GSE reform this Congress. But one thing remains abundantly clear, the debate still revolves around the reform of a multi-trillion dollar mortgage finance industry that is still highly complicated and highly political. With no easy solutions in sight, this debate may take a while.

Trackbacks (0) Links to blogs that reference this article Trackback URL
Comments (0) Read through and enter the discussion with the form at the end
Post A Comment / Question Use this form to add a comment to this entry.

Remember personal info?
Send To A Friend Use this form to send this entry to a friend via email.